Demand, Supply and Equilibrium » Market Equilibrium

Where demand meets supply

This topic is examined on Paper 1 (Microeconomics and Business Economics). So far you have looked at buyers and sellers separately. In a real market they meet. Buyers want a low price and sellers want a high price. The market settles at the one price that suits both sides.

This is market equilibrium. At the equilibrium price, the quantity buyers want to buy is exactly the same as the quantity sellers want to sell. Nobody who wants to trade at that price is left out.

Key terms:

• Market equilibrium: the point where the quantity demanded equals the quantity supplied, so the market is balanced.
• Equilibrium price: the price at which quantity demanded equals quantity supplied.
• Equilibrium quantity: the quantity bought and sold at the equilibrium price.

Finding equilibrium from a table

Here is the weekly market for apples at the Oakfield farmers' market. Quantities are in kilograms (kg).

Price per kg	Quantity demanded	Quantity supplied
£1.00	500	100
£1.50	400	200
£2.00	300	300
£2.50	200	400
£3.00	100	500

Look down the two columns and find the row where they match. At £2.00 buyers want 300 kg and sellers offer 300 kg. So the equilibrium price is £2.00 and the equilibrium quantity is 300 kg. At every other price the two columns are different, so the market is not balanced there. What happens at those prices is covered in Excess Demand, Excess Supply and Market Forces.

Finding equilibrium on a diagram

The equilibrium is where the demand curve crosses the supply curve. Here is how to draw it in the exam.

1. Draw the axes. Price goes on the vertical axis and quantity on the horizontal axis.
2. Draw a downward-sloping line and label it D (demand).
3. Draw an upward-sloping line and label it S (supply).
4. Mark the point where the lines cross. Draw a dotted line across to the price axis and label it P₁. Draw a dotted line down to the quantity axis and label it Q₁.

P₁ is the equilibrium price and Q₁ is the equilibrium quantity. For the apples, P₁ is £2.00 and Q₁ is 300 kg.

When demand shifts

Equilibrium does not stay still. If a factor other than price changes, a curve shifts and the equilibrium moves to a new point.

Check the fashion trend with numbers. The new quantity demanded is 700, 600, 500, 400 and 300 kg at £1.00 to £3.00. Supply is unchanged. The columns now match at £2.50, where both are 400 kg. So the new equilibrium is P₂ = £2.50 and Q₂ = 400 kg. Both have gone up.

When supply shifts

Check the poor harvest with numbers. Suppose supply falls by 200 kg at every price, to 0, 0, 100, 200 and 300 kg. Demand is unchanged. The columns now match at £2.50, where both are 200 kg. The equilibrium price has risen from £2.00 to £2.50 and the quantity has fallen from 300 kg to 200 kg.

What happens	Curve shift	Equilibrium price	Equilibrium quantity
Demand increases	D right	Rises	Rises
Demand decreases	D left	Falls	Falls
Supply increases	S right	Falls	Rises
Supply decreases	S left	Rises	Falls

When both curves shift

At a basic level, you may be asked what happens when demand and supply both shift. Draw both new curves and find where they cross. Use the table above to work out one change at a time, but be careful. Sometimes only one of price or quantity can be known for certain.

• Both increase: quantity definitely rises. Price depends on which shift is bigger.
• Demand increases and supply decreases: price definitely rises. Quantity depends on which shift is bigger.

Try the apples again. The health trend raises demand by 200 kg at every price and the picking machine raises supply by 200 kg at every price. New supply is 300, 400, 500, 600 and 700 kg. The new demand figures are 700, 600, 500, 400 and 300 kg. They match at £2.00, where both are 500 kg. Here the price stays the same and the quantity rises, because the two shifts are the same size.

Exam-style question

A village sells local honey. The table shows the weekly market for jars of honey.

Price per jar	Quantity demanded	Quantity supplied
£3	90	10
£4	70	30
£5	50	50
£6	30	70
£7	10	90

(a) Identify the equilibrium price and the equilibrium quantity. [2 marks]

(b) A poor summer for bees reduces the supply of honey by 40 jars at every price. Explain, with the help of a diagram, how this changes the equilibrium price and quantity. [4 marks]