1.3.4 Determination of market equilibrium

Equilibrium price and quantity

Where quantity of goods and services consumers want to buy is equal to the amount that producers want to sell

• Price at which quantity demanded = quantity supplied

Causes of changes in equilibrium price and quantity

Caused by shifts in demand or supply curve

Price of good > market equilibrium

Excess of supply

Price of good < market equilibrium

Excess demand (shortage)

Market forces when there is excess supply

• Shortage in demand = firms decrease prices (signaling + rationing)

• Lower prices = contraction of supply, extension of demand (Incentive - Less firms produce as less profit, cheaper for consumers to buy)

= new equilibrium

Market forces when there is excess demand

• Shortage of supply = firms increase prices (signaling + rationing)

• Higher prices = extension of supply, contraction of demand (Incentive, more profit so more firms produce, more expensive for consumers to buy)

= new equilibrium