Market Equilibrium

Market equilibrium is the price and quantity at which quantity demanded equals quantity supplied: Q_d = Q_s. At this point the market 'clears' — every consumer who wants to buy at the price can buy, and every producer who wants to sell at the price can sell.

Reaching equilibrium from disequilibrium:

Above equilibrium price → SURPLUS.

If price is too high, Q_s > Q_d. There's excess supply: producers can't sell all they're producing. They respond by:

• Cutting prices to clear stock.
• Reducing production.

Price falls toward equilibrium. The surplus shrinks. The market converges.

Below equilibrium price → SHORTAGE.

If price is too low, Q_d > Q_s. There's excess demand: consumers can't buy all they want. They respond by:

• Bidding up the price.
• Producers see they can charge more, and prices rise.

Price rises toward equilibrium. The shortage shrinks. The market converges.

The result. Without anyone planning it, the market mechanism — buyers and sellers acting in self-interest — pushes price toward equilibrium. This is sometimes called the 'invisible hand' (Adam Smith).

Cambridge tip. Mark schemes for 'how is equilibrium reached' questions reward (1) the precise definition (Q_d = Q_s), (2) explanation of surplus → price falls, (3) explanation of shortage → price rises. All three for full marks.

When ONE curve shifts (the other unchanged), the new equilibrium is predictable.

Demand shift right (D up):

• Equilibrium moves up the supply curve.
• New equilibrium: HIGHER price, HIGHER quantity.
• Example: rise in income increases demand for restaurant meals. Restaurants charge more and sell more.

Demand shift left (D down):

• Equilibrium moves down the supply curve.
• New equilibrium: LOWER price, LOWER quantity.
• Example: health concerns reduce demand for sugary drinks.

Supply shift right (S up):

• Equilibrium moves down the demand curve.
• New equilibrium: LOWER price, HIGHER quantity.
• Example: new technology lowers production costs of TVs.

Supply shift left (S down):

• Equilibrium moves up the demand curve.
• New equilibrium: HIGHER price, LOWER quantity.
• Example: drought reduces wheat supply.

Memory aid. When ONE curve shifts:

• D and equilibrium quantity move together (both up or both down).
• S and equilibrium quantity move together (both up or both down).
• Equilibrium price moves with the SHIFTING curve in the SAME direction (D up → P up; S up → P down).

Wait — for supply, P moves OPPOSITE to S. Let me restate: D shifts right → P up. S shifts right → P DOWN.

The clean rule:

• D right = both P↑ and Q↑.
• D left = both P↓ and Q↓.
• S right = P↓ and Q↑.
• S left = P↑ and Q↓.

Cambridge tip. Examiner reports flag candidates who state EITHER price OR quantity but not both. Always state BOTH changes. Mark schemes award one mark for each.

When BOTH curves shift simultaneously, one variable (price OR quantity) is always determinate and the other is indeterminate (depends on the relative sizes of the two shifts).

Cases:

Case 1: D right and S right (both increases).

• Q definitely rises (both shifts increase Q).
• P indeterminate (D right pushes P up; S right pushes P down — net depends on relative size).

Case 2: D left and S left (both decreases).

• Q definitely falls.
• P indeterminate.

Case 3: D right and S left.

• P definitely rises (both push P up).
• Q indeterminate.

Case 4: D left and S right.

• P definitely falls.
• Q indeterminate.

Worked example. Demand for tomatoes rises (D right) AND a drought reduces tomato supply (S left). This is Case 3 — P definitely rises; Q indeterminate.

The rule. Look at how each curve's shift affects EACH variable.

• If both shifts push P the same way → P is definite.
• If both shifts push Q the same way → Q is definite.
• The other variable is indeterminate.

How to write this in an exam. Don't pretend the answer is clean.

'Demand has shifted right and supply has shifted left. Both shifts push price upward, so price will definitely rise. However, the demand shift increases quantity while the supply shift decreases it — so the net effect on quantity depends on the relative size of the two shifts. If the demand shift is larger, quantity rises; if the supply shift is larger, quantity falls.'

Cambridge tip. Mark schemes explicitly REWARD candidates who identify indeterminacy. They penalise candidates who claim a definite answer when both curves shift. Be honest.