Market equilibrium and changing prices Cambridge IGCSE Economics revision
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In plain words
Put the demand curve and the supply curve on one diagram. Where they cross, the amount buyers want equals the amount sellers offer. That price is the equilibrium price, and the market has no reason to move from it.
At any other price the market is out of balance, and the price is pushed back. This is the price mechanism: prices act as signals that move resources to where they are wanted.
5 things to know
- Equilibrium: quantity demanded equals quantity supplied.
- Price above equilibrium: supply is greater than demand. There is a surplus (excess supply), and sellers cut prices to clear it.
- Price below equilibrium: demand is greater than supply. There is a shortage (excess demand), and the price is bid up.
- An increase in demand raises both price and quantity. A decrease lowers both.
- An increase in supply lowers price and raises quantity. A decrease raises price and lowers quantity.
Worked example
At a price of $6, 400 units are demanded and 250 supplied. Is there a shortage or a surplus, and how big?
- Compare the two: demand (400) is greater than supply (250).
- Demand greater than supply is a shortage.
- Shortage = 400 − 250 = 150 units, so the price will tend to rise.
Tips and tricks
- Work in three steps every time: which curve shifts, which way, then read the new price and quantity where the curves now cross.
- Shortage means the price is too low. Surplus means the price is too high. Students often reverse them.
It lands in your notebook with its questions as flashcards.
Market equilibrium and changing prices: 5 questions and answers
These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.
At the equilibrium price
Equilibrium is where the two curves cross.
The price in a market is above the equilibrium. What is there?
At a high price firms supply more than consumers want to buy.
Demand for a product increases while supply is unchanged. What happens?
The demand curve moves right, along the supply curve, to a higher price and quantity.
New technology cuts the cost of making televisions. What happens in the market for televisions?
Supply increases, so the curves cross at a lower price and a larger quantity.
How does the price mechanism remove a shortage?
A rising price cuts the amount demanded and brings out more supply until they match.
Quiz
5 questions
Tap an answer and you’ll see straight away whether it’s right, and why.
Worksheet
3 questions, 8 marks. Write your answers on paper, then check them.
Market equilibrium and changing prices
Cambridge IGCSE Economics 0455 · 8 marks · papermunch.org
Name ______________________________ Date ______________
Define equilibrium price.[2]
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The price at which the quantity demanded equals the quantity supplied.
A new report says that eating fish is very good for health. Explain the effect on the market for fish.[3]
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Tastes move in favour of fish, so demand increases and the demand curve shifts right. The equilibrium price rises and the quantity bought and sold rises.
At $12, the quantity supplied of a product is 900 and the quantity demanded is 600. Calculate the surplus and explain what will happen to the price.[3]
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Surplus = 900 − 600 = 300 units. Sellers have unsold stock, so they lower the price. As it falls, demand extends and supply contracts until they are equal.
Answers: Market equilibrium and changing prices
- 1. The price at which the quantity demanded equals the quantity supplied.
- 2. Tastes move in favour of fish, so demand increases and the demand curve shifts right. The equilibrium price rises and the quantity bought and sold rises.
- 3. Surplus = 900 − 600 = 300 units. Sellers have unsold stock, so they lower the price. As it falls, demand extends and supply contracts until they are equal.