Market equilibrium

LO:

• Explain and illustrate how a market is able to reach equilibrium in respect of price and quantity.​

Market: a system in which the interaction between buyers & sellers determines the prices and quantities traded of a product

Market equilibrium: a condition whereby the Qd & Qs in a market are equal

• the price at which this occurs is known as ‘equilibirum price’

P Mechanism: the system or process whereby changes in demand and supply determine the price in the marker

Surplus

• excess in Qs

  • e.g. $10 → Qd: 5 units Qs:12 units

• not in equilibrium 

• signals that price is too high

• to get rid of excess stock, sellers reduce P

  • P factor change

  
  

  • What do you think is going to change as e price starts to fall?

    • Qd increases/dd expands → movement curve downwards

    • Qs decrease/ss contracts → movement curve downwards

    • [both follow movement of price]

When P not in equilibrium

Shortage

• excess in demand

  • $10 → Qd:50 Qs:30

• signals price is too low

• Sellers will increase price as they are motivated by profit

  • Qd decrease/dd contracts → movement curve upwards

  • Qs increases/ss expands → movement curve upwards

Effect of a change of non-price determinant (NPD) on equilibrium

• when a NPD changes, it affect the dd or ss of the produce (increase/decrease)

• shifts the dd/ss curve

• a disequilibrium will occur at the original P

  • shortage/surplus

• disequilibrium will cause either an upward pressure or downward pressure on the P

  • P of produce start to change

• sellers & buyers will then respond to the change in price

• end result → new equilibrium price & quantity traded

Effect of an increase in DD on eq. P & Q​

• e.g. if Y level rises, dd increases as consumers have more money

  • dd curve to shift to the right (D → D1)

• at the og P of Eq.P1, shortage of GH

• there will be upward pressure of price as firms increase price to earn more profit

  • P⬆️

  • DD contract, movement up DD1 SS expands