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2.5 Notes, MC, SQs

Market equilibrium, economics price determination

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233 views4 pages

2.5 Notes, MC, SQs

Market equilibrium, economics price determination

Uploaded by

Simona Shulman
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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2.

5 Price determination
Episode 14: Market Equilibrium
2.5.1. Definition, drawing and interpretation of demand and supply
market schedules and curves used to establish equilibrium price and
equilibrium sales in the market
A market is any place that brings together buyers and sellers. For example, Amazon,
the stock market, a fruit and veg market and a shop or shopping center.
Consumers seek low prices. Sellers want high prices. Equilibrium price is defined as
the price where demand and supply are equal and there are no shortages or
surpluses of the product. Equilibrium may also be called the market price or the
market clearing price. This is shown in the diagram below, where the supply curve
intersects with the demand curve at Pe, Qe.

Define ‘equilibrium price’. (2)

1
2.5.2 Definition, drawing and interpretation of demand and supply,
market schedule and curves used to identify disequilibrium prices and
disequilibri shortages (demand exceeding supply) and surpluses (supply
um exceeding demand)
Market disequilibrium is a situation where demand and supply are not equal at the
current market price. Consider the following two diagrams.

In this diagram at P1 price is above the equilibrium and the quantity supplied QS is
greater than quantity demanded QD. The market is in disequilibrium and there is
excess supply, i.e. a surplus. Firms will need to lower their prices if they are to clear
the surplus. Falling prices signal a surplus in a market. As this happens, the
incentive to produce falls. Some firms will leave the market as at lower prices and
they will be either unable or unwilling to supply the product and supply will contract.
The red arrow shows this. As prices fall consumers will become more willing and
able to purchase the product and demand will extend. The green arrow shows this.
This process continues until equilibrium price is reached and quantity demanded is
equal to quantity supplied at Pe, Qe.

In this diagram at P1 price is below the equilibrium and the quantity demanded QD
is greater than quantity supplied QS. The market is in disequilibrium and there is
excess demand, i.e. a shortage. As consumers compete for the limited goods
available pressure is placed on the price to increase. The rising price signals a
shortage. At higher prices the willingness and ability of consumers to purchase the
product will reduce and demand will contract. Shown by the red arrow. At higher
prices supply will extend as the incentive of higher profits encourages firms to divert
resources towards the product. Supply will extend as firms become more willing and
able to supply the product. Shown by the green arrow. This process continues until
equilibrium price is reached and quantity demanded is equal to quantity supplied at
Pe, Qe.

2
Define market disequilibrium. (2)

3
Explain the difference between market equilibrium and market disequilibrium. (4)

Explain why price tends to move towards equilibrium over time. (4)

Explain how market forces would respond to a shortage in drinking water. (4)

Explain what impact an imbalance between supply and demand is likely to have on
price and quantity traded. (4)

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