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Market equilibrium
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Where demand meets supply, the market settles at an equilibrium price. Changes in demand or supply move that equilibrium.
Equilibrium
Equilibrium is where quantity demanded = quantity supplied. This sets the equilibrium price and quantity.
Excess demand and excess supply
Excess demand (shortage): at a price below equilibrium, quantity demanded > quantity supplied.
Excess demand = quantity demanded − quantity supplied.
Excess supply (surplus): at a price above equilibrium, quantity supplied > quantity demanded.
Excess supply = quantity supplied − quantity demanded.
Excess demand = quantity demanded − quantity supplied.
Excess supply (surplus): at a price above equilibrium, quantity supplied > quantity demanded.
Excess supply = quantity supplied − quantity demanded.
Market forces
With excess supply, sellers cut prices to clear unsold stock, until equilibrium is reached.
With excess demand, prices are bid up, until equilibrium is reached.
Shifts: an increase in demand raises equilibrium price and quantity. An increase in supply lowers price and raises quantity.
With excess demand, prices are bid up, until equilibrium is reached.
Shifts: an increase in demand raises equilibrium price and quantity. An increase in supply lowers price and raises quantity.
Using the table, what is the excess demand at a price of £2?
- At £2: demanded 500, supplied 100
- 500 − 100
Answer: 400 units
Equilibrium: demand = supply. Below equilibrium price there is excess demand; above it, excess supply. Market forces move price back to equilibrium. Shifts in demand or supply change equilibrium price and quantity.
The interactive lesson includes the diagrams for this topic.
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