Chapter 8 - Market Equilibrium

Supply and demand can be shown on one diagram.

The point at which demand and supply cross and are equal is called

Market equilibrium

Market equilibrium is also called

equilibrium point or equilibrium price

This is known as the market clearing price as all products will be sold at this price

eg,

all buyers get the exact amount they want to buy at this price and all sellers provide exactly the amount that they want to sell at this price

(thus there is nothing leftover, i.e the market has cleared)

Any change in demand or supply will lead to

a new equilibriumprice

Draw the interaction of supply and demand on a graph

At price of P quantity demanded is ……. to quantity supplied

All products are …… and no products are …… ……. i.e the market has …..

At this price ….. products that have been offered for sale by suppliers have been ……. by buyers and all supply has had an ……. ………

equal

sold, left over, cleared

all, bought, equal demand

Draw excess supply on a graph

If price is set at P1, we would have a position of …… …….

Buyers would demand ……. (?) at the higher price but firms would wish to supply ……… (?) at this price

This would lead to a situation of too much …….. (?-?) in the market

To solve this problem firms would need to …… price to get rid of excess products

excess supply

less (Q1), more (Q2)

supply (Q2-Q1)

lower

Draw an excess demand graph

If price was set at P2, we would have a position of …… ……..

Buyers would demand ……. (?) at the lower price but firms would wish to supply …… (?) at this price

This would lead to a situation of too much ….. (?-?) in the market

To improve profitability firms could ….. price, reducing the excess demand

excess demand

more (Q2), less (Q1)

demand (Q2-Q1)

raise

Market forces are always pushing prices

towards market equilibrium - the price at which demand equals supply and there are no products left over in the market

Too much supply leads to ……. ……

Too much demand leads to …… …….

lower prices

higher prices

Show how market forces push prices to a market equilibrium price

Draw an increase in demand (market equilibrium)

What is the new market equilibrium?

P1 Q1

The shift in demand has led to a movement along

The supply curve

Draw an increase in supply

What is the new market equilibrium?

P1 Q1

The shift in supply has led to a movement along the

demand curve