How to Calculate the Equilibrium Level of Income

As investors, it’s important for us to understand both accounting and economic concepts, like the equilibrium level of income -- it makes us better at choosing good companies that can go the distance. For us, the law of supply and demand is everything, so when a company makes the same amount of product as is in demand, that’s financial nirvana.

So if your favorite company makes snack cakes, and they’ve somehow managed to crack the code on just how many snack cakes it takes to perfectly satisfy consumer demand, they’re neither spending extra money on storing excess snack cakes nor spending a lot of extra money trying to keep up with demand. All things are in perfect balance.

Loading paragraph...

Balancing rocks sitting on the beach. — Image source: Getty Images.

Loading image...

Loading paragraph...

Law of Supply and Demand

The law of supply and demand is an economic theory asserting that supply and demand will meet each other at a certain equilibrium price.

A company where the equilibrium level of income is heavy on the supply side is storing products away in warehouses that cost money to operate and maintain and sometimes discounting those products deeply just to move them (or, in the case of snack cakes, paying to dispose of them).

Imbalance in the equilibrium level of income can be a good economic indicator for the wider economy, however, since these companies are putting their money into paying more labor and buying more goods, which can translate into more spending, more taxes paid to governments by workers, and so forth. But it’s not generally directly great for your investment.

Loading paragraph...

Related investing topics

Loading paragraph...

Top Stocks to Buy and Hold in 2025

Get a list of the best companies to buy and hold for the long haul.

How to Research Stocks

Good research can help investors find the best companies to invest in.

How to Calculate Average Trade Price

If you bought a different number of shares with each trade, a simple average of the prices won't be accurate. Learn the right way

Loading hub_pages...

Loading paragraph...

Loading faq...

About the Author

Kristi Waterworth has been a contributing real estate and financial expert at The Motley Fool, covering real estate, investing, and personal finance topics, since 2020. Kristi has been interviewed by various TV media outlets and podcasts for her real estate investing expertise – from residential real estate to digital real estate and everything in between. Kristi’s journalist career spans over 25 years, and she has written about real estate investing, homeownership, and home construction specifically for the last decade. She was also previously a licensed Realtor and general building contractor before the Great Recession and housing market collapse. She holds a bachelor’s degree in American history from Columbia College in Missouri.

TMFMaldivesBlue

@MaldivesBlues

The Motley Fool has a disclosure policy.