a) equilibrium price and quantity

a) equilibrium price and quantity and how they are determined

b) the use of supply and demand diagrams to depict excess supply and demand

c) the operation of market forces to eliminate excess demand and excess supply

price → determined by the laws of supply and demand

market equilibrium = quantity demanded of a product = quantity supplied of a product

market disequilibrium = quantity demanded of a product =/= quantity supplied of a product

• causes an excess demand OR excess supply

• price = below equilibrium price OR above equilibrium price

excess demand = quantity demanded > quantity supplied

• price = too low OR quantity demanded = too high

price on the graph = lower than equilibrium price on the graph

• excess demand = area below the supply and demand curve between price and equilibrium price

excess supply = quantity supplied > quantity demanded

• price = too high OR quantity demanded = too low

price on the graph = higher than equilibrium price on the graph

• excess supply = area above the supply and demand curve between price and equilibrium price

market forces will eliminate excess demand and excess supply

• when there is excess demand

  • firms increase price → contraction in quantity demanded + extension in quantity supplied → increase in revenue

• when there is excess supply

  • firms decrease prices → contraction in quantity supplied + extension in quantity demanded → increase in revenue