Competitive Market

Equilibrium: Demand &

Supply
Unit 2 - Lesson 4
Learning Outcomes:
● Define all the terms in orange bold in Section 2.4
● Draw a diagram to illustrate how demand and supply interact to
determine market equilibrium.
● Analyse demand and supply curve shifts that give rise to a new
market equilibrium, using the concepts of excess demand and supply
● Draw diagrams to illustrate how shifts in demand and supply give rise
to a new market equilibrium.
Draw a diagram to illustrate how demand and supply interact to
determine market equilibrium.

Market Equilibrium

When the quantity demanded, amount the consumer is willing and able to
purchase at a specific price level (ceteris paribus) is equal to the quantity
supplied, amount the producer is willing and able to supply to the market at a
specific price level (ceteris paribus).

The forces of Supply and Demand are in balance.

There is no tendency for price to change.

Occurs where the Demand and Supply Curve intersect at a specific price.
Draw a diagram to illustrate how demand and supply interact to
determine market equilibrium.
Equilibrium Price: the price when quantity
demanded is equal to quantity supplied - the
market equilibrium.

The equilibrium price of chocolate bars is $3.

Equilibrium Quantity: the quantity when

quantity demanded is equal to quantity
supplied - the market equilibrium.

The equilibrium quantity of chocolate bars is

8,000 per week.
Draw a diagram to illustrate how demand and supply interact to
determine market equilibrium.
Disequilibrium in a market occurs when the quantity demanded does not
equal the quantity supplied at a specific price and quantity.

Disequilibrium - Excess Supply (Surplus)

When the quantity supplied is greater than

the quantity demanded at a particular price.

Occurs when the price is higher than the

equilibrium price.

At $5 there is excess supply of 8,000

chocolate bars per week. (12 - 4 = 8)
Draw a diagram to illustrate how demand and supply interact to
determine market equilibrium.

Disequilibrium - Excess Demand (Shortage)

When the quantity supplied is less than the

quantity demanded at a particular price.

Occurs when the price is lower than the

equilibrium price.

At $2 there is excess demand of 4,000

chocolate bars per week. (10 - 6 = 4)

Don’t forget your scale - thousands of

chocolate bars per week!
Draw a diagram to illustrate how demand and supply interact to
determine market equilibrium.
The existence of excess demand or excess
supply in a free market will cause the price to
change so that the quantity supplied is equal to
the quantity demanded.

Excess Demand will result in prices to

increase until quantity demanded is equal to
quantity supplied.

Excess Supply will result in prices decreasing

until the quantity demanded is equal to quantity
supplied.
Analyse demand and supply curve shifts that give rise to a new
market equilibrium, using the concepts of excess demand.
Increases in demand and decreases in supply result in the creation of excess
demand in the market at the original equilibrium price. The excess in demand
signals the market to increase the price.
Analyse demand and supply curve shifts that give rise to a new
market equilibrium, using the concepts of excess demand.
Step to explain in detail:

● Market is in equilibrium - point a - price

(P1) and quantity (Q1).
● Change in a non-price determinant of
demand - tastes and preferences.
● Results in an increase in demand (D1 -
D2).
● After the increase in demand at original
equilibrium price (P1) there exists
excess demand (difference between
point b - point a)
Analyse demand and supply curve shifts that give rise to a new
market equilibrium, using the concepts of excess demand.
● Signals the market to increase price (P1 - P2).
● Increase in price (P1 - P2) decrease the quantity
demanded (Law of Demand - inverse relationship
between price and quantity demanded) - from point
a - c.
● Increase in price (P1 - P2) increases the quantity
supplied (Law of Supply - positive relationship
between price and quantity supplied) - from point b
- c.
● A new equilibrium price and quantity are set at
point c - P2 and Q2.
● An increase in demand results in an increase in
price and increase in quantity supplied.
Analyse demand and supply curve shifts that give rise to a new
market equilibrium, using the concepts of excess demand.
Step to explain in detail:

● Market is in equilibrium - point a -

price (P1) and quantity (Q1).
● Change in a non-price determinant
of supply - taxes.
● Results in an decrease in supply (S1
- S3).
● After the decrease in supply at
original equilibrium price (P1)
there exists excess demand
(difference between point a - point b)
Analyse demand and supply curve shifts that give rise to a new
market equilibrium, using the concepts of excess demand.
● Signals the market to increase price (P1 - P3).
● Increase in price (P1 - P3) decrease the
quantity demanded (Law of Demand - inverse
relationship between price and quantity
demanded) - from point a - c.
● Increase in price (P1 - P3) increases the
quantity supplied (Law of Supply - positive
relationship between price and quantity
supplied) - from point b - c.
● A new equilibrium price and quantity are set at
point c - P3 and Q3.
● An decrease in supply results in an increase in
price and decrease in quantity demanded.
Analyse demand and supply curve shifts that give rise to a new
market equilibrium, using the concepts of excess supply.

Increases in supply and decreases in demand result in the creation of excess

supply in the market at the original equilibrium price. The excess in supply signals
the market to decrease the price.
Analyse demand and supply curve shifts that give rise to a new
market equilibrium, using the concepts of excess supply.

Step to explain in detail:

● Market is in equilibrium - point a - price

(P1) and quantity (Q1).
● Change in a non-price determinant of
supply - subsidies.
● Results in an increase in supply (S1 -
S2).
● After the increase in supply at original
equilibrium price (P1) there exists
excess supply (difference between
point b - point a)
Analyse demand and supply curve shifts that give rise to a new
market equilibrium, using the concepts of excess supply.
● Signals the market to decrease price (P1 - P2).
● Decrease in price (P1 - P2) increases the
quantity demanded (Law of Demand - inverse
relationship between price and quantity
demanded) - from point a - c.
● Decrease in price (P1 - P2) decreases the
quantity supplied (Law of Supply - positive
relationship between price and quantity
supplied) - from point b - c.
● A new equilibrium price and quantity are set at
point c - P2 and Q2.
● An increase in supply results in an decrease in
price and increase in quantity demanded.
Analyse demand and supply curve shifts that give rise to a new
market equilibrium, using the concepts of excess supply.

Step to explain in detail:

● Market is in equilibrium - point a - price (P1)

and quantity (Q1).
● Change in a non-price determinant of
demand - income increase - inferior good.
● Results in an decrease in demand (D1 -
D3).
● After the decrease in demand at original
equilibrium price (P1) there exists excess
supply (difference between point a - point b)
Analyse demand and supply curve shifts that give rise to a new
market equilibrium, using the concepts of excess supply.
● Signals the market to decrease price (P1 - P3).
● Decrease in price (P1 - P3) increases the
quantity demanded (Law of Demand - inverse
relationship between price and quantity
demanded) - from point b - c.
● Decrease in price (P1 - P3) decreases the
quantity supplied (Law of Supply - positive
relationship between price and quantity supplied)
- from point a - c.
● A new equilibrium price and quantity are set at
point c - P3 and Q3.
● An decrease in demand results in an decrease
in price and decrease in quantity supplied.
Distinguish between free and economic goods
Free Good

Goods that are not scarce and therefore have

zero opportunity cost.

The quantity supplied is greater than the

quantity demanded at a price of zero (0).

Supply is so large relative to the demand

there is excess quantity supplied even at a
price of zero (0)
Distinguish between free and economic goods
Economic Goods

A good whose quantity supplied is less than the quantity demanded at a price of zero.

A free good can become an economic good if there is a large decrease in supply such
that the quantity demanded at zero is greater than the quantity demanded.
OR
There is a large increase in the demand