3.5 The Determination Of Equilibrium Market Prices

Question 1

What is equilibrium price and quantity?

Answer 1

• This is when supply meets demand.
• On the diagram, this is shown by P1 and Q1.
• At market equilibrium, price has no tendency to change, and it is known as the
  market clearing price.

Question 2

What is excess demand?

Answer 2

• below market equilibrium.
• Demand is now greater than supply, this is a state of disequilibrium.
• demand price does not equal the supply price, and the quantity demanded does not equal the quantity supplied.
• This is a shortage in the market.
• This pushes prices up and causes firms to supply more.
• Since prices increase, demand will contract.

-Once supply meets demand again, price will reach the market clearing price, P1.

Question 3

What is excess supply?

Answer 3

• This is when price is above P1.
• There is a surplus
• Price will fall back to P1 as firms lower their prices and try to sell their goods.
• The market will clear and return to equilibrium

Question 4

What are new market equilibriums?

Answer 4

• When the demand or supply curves shift due to the PIRATES or PINTSWC reasons, new market equilibriums are established.
• For example, if there was an increase in the size of the population, demand would shift from D1 to D2.
• Price would increase to P2 and suppliers would supply a larger quantity of Q2.
• A new market equilibrium is established at P2 Q2