1.2.6 Price determination

What is market equilibrium?

State where the ‘market clears’.

Occurs when demand equals supply

Plot these figures on a graph

(ignore annotations for now)

When the price is at 80p, is there an surplus or shortage in supply/ demand?

excess (surplus) in supply

Explain how equilibrium is reached after a surplus in supply - and draw a diagram of this

• Quantity supply (530, 000 tonnes) > (greater than) Quantity demand (200,000)

• Firms will contract supply to cut stocks

• This will lead to a fall in price 

• Leading to an expansion in demand along the curve 

• Equilibrium is reached at 60p and 350, 000 tonnes

When the price is at 40p is there a surplus or shortage in supply/ demand?

There is excess demand - shortage in supply

Explain how equilibrium is reached after a shortage in supply- and draw a diagram of this

• Firms will expand supply to meet to meet the shortage, causing prices to rise

• Rising prices will lead to a contraction in demand

• New equilibrium is reached at 60p and 350,000 tonnes

When price is 60p is there a surplus or shortage in supply/ demand?

Neither there is equilibrium in supply and demand - market clearing price

Explain when an equilibrium occurs

quantity demand (Qd) = quantity supply (Qs) and there’s not tendency to change