1.2.3 Market equilibrium

market equilibrium

when there is a balance between supply and demand in a market

market demand

the total quantity demanded for a product in a market by all customers

market supply

the total quantity of a product supplied to a market by suppliers

what happens to equilibrium price and equilibrium quantity if demand increases

• equilibrium price = higher

• equilibrium quantity = higher

what happens to equilibrium price and equilibrium quantity if demand decreases

• equilibrium price = lower

• equilibrium quantity = lower

what happens to equilibrium price and equilibrium quantity if supply increases

• equilibrium price = lower

• equilibrium quantity = higher

what happens to equilibrium price and equilibrium quantity if supply decreases

• equilibrium price = higher

• equilibrium quantity = lower

what is equilibrium price

when the amount demanded matched the amount supplied

• when the quantity that buyers demand is the same as the quantity sellers wish to supply - sometimes referred to as market clearing price

• the equilibrium price (P*) and equilibrium quantity (Q*) is where the 2 curves meet

how does a surplus occur

when the price increases

• in the price of a product increases this would cause movement to the right along the supply curve, and movement to the left along the demand curve

• this would mean that quantity demanded (Qd) would be less than the quantity supplied (Qs) and so there would be excess supply - a surplus in the market

how does a shortage occur

when the price decreases

• if the price of a product was decreases, this would result in movement to the left along its supply curve and movement to the right along the demand curve

• this would mean that there would be more demand than supply, and so there would be excess demand an therefore a shortage in the market

what happens to the supply and demand curve if there is a rise in demand

shifts the demand curve to the right

• the demand shift to the right form D1 to D2

• but at a price of P1, there is a shortage in the market. the price needs to rise to clear the marker of excess demand

• a new equilibrium quantity (Q2) is reached at a higher price than before - P2

what happens to the supply and demand curve if there is a fall in demand

shifts to demand curve to the left

• a fall in customer demand shifts the demand curve to the left from D1 to D2

• but at a price of P1 theres. asurplus in the market so the price needs to fall to clear the market of excess supply

• a new equilibrium (Q2) is reached at a lower price than before (P2)

what happens to the supply and demand curve if there is a rise in supply

shifts the supply curve to the right

• an increase in supply shifts the supply curve to the right from S1 to S2

• at a price of P1, there’s a surplus in the market, so the price needs to fall to clear the market of excess supply

• a new equilibrium quantity (Q2) is reached at a lower price than before (P2)

what happens to the supply and demand curve if there is a fall in supply

shifts the supply curve to the left

• a decrease in supply shifts the supply curve to the left from S1 to S2

• at a price of P1 there is a shortage in the ,market so the price needs to rise to clear the excess demand

• a new equilibrium quantity (Q2) is reached at a higher price than before (P2)