Quick Summary
- Market Equilibrium — where demand equals supply at the market clearing price
- Excess Demand — shortage; price too low; more buyers want it than sellers supply
- Excess Supply — surplus; price too high; more goods than buyers want
- Self-Correction — markets automatically adjust price to eliminate shortages and surpluses
- Demand & Supply Schedules — tables showing quantities at different prices; used to find equilibrium
1. Market Equilibrium
What is a Market?
A market is any place where buyers and sellers come together to trade goods or services. Markets don't have to be physical locations—they can be a McDonald's (physical), eBay (virtual), or even a WhatsApp group buying pizza together. What matters is that buyers and sellers meet and agree on a price.
How Do Prices Get Determined?
In a market system, prices are determined by the interaction of demand and supply. Here's the logic:
- Buyers show they want something by purchasing it at a given price
- Sellers watch how quickly products sell and adjust their prices accordingly
- This back-and-forth continues until both are satisfied—that's equilibrium
If buyers don't think the price is worth paying, they exercise their consumer sovereignty—they simply choose not to buy. Sellers see this and realize the price is wrong.
What Is Equilibrium?
Market Equilibrium occurs when Quantity Demanded = Quantity Supplied
At this point, the price is called the market clearing price. It's the price at which sellers can clear (sell off) their stock at an acceptable rate, and buyers are satisfied the product is worth paying for.
Think of it as a balance scale. When demand and supply are equal, nothing tips the balance and nothing forces a change. That's equilibrium.
Diagram: Market in Equilibrium
PRICE ($)
↑
│ S (Supply)
│ /
│ /
P │-------●------------ Market Clearing Price
│ /│\
│ / │ \
│ / │ \
│ / │ \ D (Demand)
│ / │ \
│ / │ \
└─────────────────→ QUANTITY
Q
At point (P, Q): demand = supply ✓
Market is in equilibrium—no pressure to change
Key insight: Any price above or below P creates disequilibrium. The market won't stay at that point for long—price pressure will push it back to equilibrium.
⚡ Quick Check
If a market is in equilibrium at price £50 and quantity 200 units, what must be true about quantity demanded and quantity supplied?
2. Excess Demand (Shortages)
What Is Excess Demand?
Excess Demand = Quantity Demanded > Quantity Supplied
There's a shortage in the market. More people want the product than the seller has available. This happens when price is too low or when demand suddenly spikes so high that supply can't keep up.
Real Example: Electric Scooters
A new electric scooter company sets the price at £30. At this price, 400 people want to buy, but the company only has 100 scooters in stock.
- Quantity Demanded = 400 units
- Quantity Supplied = 100 units
- Shortage = 400 − 100 = 300 units short
The market is in disequilibrium. Thirty pounds is obviously too cheap.
What Happens When There's Excess Demand?
The Market Response (How Price Fixes It)
Key Insight: