Summary
Market equilibrium is the point where market demand equals market supply, with no tendency for change unless conditions of demand or supply change. Changes in demand or supply can lead to shifts in equilibrium price and quantity.
- Market Equilibrium — the price and quantity at which demand equals supply. Example: At $5, quantity demanded equals quantity supplied.
- Excess Supply (Surplus) — when quantity supplied is greater than quantity demanded. Example: At $8, quantity supplied is 160 units, but demand is only 40 units.
- Excess Demand (Shortage) — when quantity demanded is greater than quantity supplied. Example: At $2, quantity demanded is 160 units, but supply is only 40 units.
- Price Mechanism — a system where demand and supply interact to determine prices, performing signalling, incentivizing, and rationing functions. Example: Rising demand for alkaline water shifts the demand curve right, increasing price and quantity.
Exam Tips
Key Definitions to Remember
- Market Equilibrium
- Excess Supply (Surplus)
- Excess Demand (Shortage)
- Price Mechanism
Common Confusions
- Confusing surplus with shortage
- Misunderstanding how price changes affect supply and demand
Typical Exam Questions
- What is market equilibrium? Market equilibrium is the price and quantity where demand equals supply.
- How does an increase in demand affect equilibrium? It leads to a higher price and quantity.
- What happens when there is excess supply? Prices tend to fall to eliminate the surplus.
What Examiners Usually Test
- Understanding of how equilibrium is determined
- Ability to explain shifts in demand and supply
- Application of the price mechanism in different scenarios