By now you are familiar with the charts above. The chart on the left represents the demand for single family homes at the given price. The chart on the right represents the supply of single family homes that home builders are willing to build at the given price.

We could graph the demand curve and supply curve separately as we have previously discussed, however, to better understand how the demand and supply for single family homes will form a market price, let's put both the demand curve and supply curve on one graph. That graph would look the graph below:

Notice that just as in our previous graphing of supply and demand curves, the X-axis represents the quantity (in this case quantity of single family homes) and the Y-axis represents the price.

What is Market Equilibrium? Regardless of the product, be it homes, cars, or potato chips, the point on the graph where the demand curve and supply curve meet is called market equilibrium. Another way to state this is that market equilibrium is the point at which the supply of goods and the demand for those goods meet.

For example, in the above graph you can see that market equilibrium occurs at a price of $236,000 and 27,000 homes. This is the point at which the home builder's willingness to supply is equal to the price that home buyers are willing to pay.

When the demand exceeds the supply you have a situation of excess demand, also know as a shortage.

When the demand is less than the supply you have a situation of excess supply, also know as a surplus.