we've talked about how the demand curve shows us willingness to pay and is a marginal benefit curve and how the supply curve shows willingness to accept and is a marginal cost curve in a competitive market what happens when those two concepts meet we get an equilibrium this is a point where there is no push for change in the system we could summarize it as quantity supplied equals quantity demanded let's draw out a set of supply and demand curves now let's go with tacos this time so we have upward sloping supply and downward sloping demand the point where they meet is where the willingness to pay equals the willingness to accept the point where marginal benefit equals marginal cost the point where quantity supplied equals quantity demanded this gives us the equilibrium quantity and the equilibrium price let's say that that price is three dollars and this quantity is 100 tacos okay so i drew two lines that intersect at this point but what does it really mean to see why it's in equilibrium let's start away from it what if the price of tacos was just two dollars we see that people want this many tacos at the at two dollars but sellers are only willing to sell them this many there's a shortage not enough tacos there aren't enough tacos sold at two dollars to meet people's demand for tacos some of these people are willing to pay 2.25 for a taco but they can't get one so what happens the long lines at taco shops lead prices to rise for all the reasons we discussed in the module on supply these producers are willing to sell tacos for two dollars and 25 cents or 2.50 or 2.75 and they're will they're able to find buyers who are willing to pay that amount production increases but because of increasing marginal costs the price of tacos goes up when the price of tacos goes up people want fewer of them i might buy eight tacos at two dollars but only six tacos when they're two dollars and fifty cents that process will continue until the number of tacos supplied equals the number of tacos demanded where does that happen here where the price is three dollars and marginal benefit equals marginal cost what if the price is four dollars well taco shops want to supply this many tacos at four dollars but people only want this many that's a surplus too many tacos so now the shops have a lot of downtime they may be losing money they cut their prices hoping to get more people to come in there are shops willing to sell at three dollars and fifty cents or three dollars and twenty five cents and they're able to find buyers who are willing to pay that amount pretty soon the price has settled back to the point where quantity supplied equals quantity demanded the equilibrium the place where there's no push for change above this price there's a push downwards below this price there's a pressure upwards when marginal benefit is greater than marginal cost there are people there are buyers who are willing to pay more than sellers are willing to accept there can be gains from trade these buyers over here want a taco so badly that they're willing to pay four dollars for it and these producers are willing to sell these people a taco for two dollars both buyers and sellers over here are better off in this voluntary exchange there are gains from trade but if marginal benefit is less than marginal cost like over here then someone is only willing to pay two dollars for a taco but the shops are selling them for four dollars there are no gains from trade because paying four dollars for something that's only worth two dollars to you is not a good move it's not rational so this exchange doesn't happen what's the last exchange that does happen the one where the buyer's willingness to pay is pretty much equal to the seller's willingness to accept marginal benefit equals marginal cost so important i'm going to say it again marginal benefit equals marginal cost that determines equilibrium price and quantity this is a really powerful concept and it's at the heart of most of what we're going to do for the rest of the course and in the next video we'll go through a numerical example