CHAPTER 9

PRICE DETERMINATION

Economics IGCSE – 9BR

Learning objectives

By the end of this chapter you will be able to:

Demand and supply schedules and curves to establish equilibrium

Use prices and sales in a market

Demand and supply schedules and curves to identify disequilibrium

Use prices and excess demand and supply in a market
Introducing the topic

M a r ket t r a d e r s o f f r e s h f i s h a r e s o m et i m e s l e f t w i t h
u n s ol d f i s h a t t h e e n d o f t h e d ay w h i ch t h ey h ave to
t h r o w a w a y. T h e n ex t d a y t h e y a r e l i k e l y t o l o w e r
t h e p r i c e t h ey ch a r g e. O n o t h e r o c c a s i o n s, t h ey m ay
f i n d t h a t t h e y a r e s e l l i n g o u t o f f i s h v e r y q u i c k l y.

I n t h i s c i r c u m s t a n c e, t h ey m ay d e c i d e to r a i s e t h e i r
pr ice. In practice, it can be diff icult for producers
to k n ow w h a t i s t h e a p p r o p r i a t e p r i c e to ch a r g e a n d
there may have to be adjustments to eliminate
shor tages and surpluses.
How are prices determined?
C o n s u m e r s wa n t l ow p r i c e s , w h i l s t s e l l e r s wa n t h i g h p r i c e s . S o h ow i s
the pr ice of a product deter mined?

I n s o m e c a s e s , t h e r e i s d i r e c t b a r g a i n i n g b e t we e n b u y e r s a n d s e l l e r s .
B u y e r s o f t e n h a g g l e w i t h m a r ke t t r a d e r s , s e e k i n g t o d r i v e t h e p r i c e
d ow n , a n d t h e t r a d e r s a i m t o ke e p t h e p r i c e r e l a t i v e l y h i g h .

In other cases, the bargaining is more indirect. Fir ms estimate and

t h e n c h a r g e w h a t t h ey t h i n k i s t h e e q u i l i b r i u m p r i c e .

• I f t h ey c a n ’ t s e l l a l l o f t h e i r o u t p u t a t t h i s p r i c e , t h ey w i l l l ow e r i t .

• I f, o n t h e o t h e r h a n d , t h ey f i n d t h a t c o n s u m e r s wa n t t o b u y m o r e
t h a n w h a t t h ey a r e o f f e r i n g f o r s a l e a t t h i s p r i c e , t h ey w i l l r a i s e t h e
pr ice.
Market equilibrium

So what do you think the

equilibrium price means?
Equilibrium price

Equilibr i um pr i ce is also sometimes refer r ed to as

the market clear i ng pr i ce.

• It is the pr i ce where demand and suppl y are

equal , and so there are no shor t ages or
surpluses of the product.

• The equilibr i um pr i ce of a product can be found

by compar i ng the demand and suppl y schedules
of that product, and seeing where demand and
suppl y are equal.
What is the
Price Quantity Quantity
equilibrium price? (S) demanded supplied
50 2200 6000
Table 9.1: The daily 45 2500 5000
demand for and supply of 40 3000 4300
train tickets from Station 35 3800 3800
X to Station Y
30 5000 3600
25 7000 3500
Draw a Demand
and Supply
diagram for the
schedule above
Show the equilibr ium
pr ice at P and the
S
equilibr ium quantity at
Q.

P r ices will stay at P

and sales at Q until
demand and suppl y D
conditions change.
  Ma r ket f o r c e s m ove p r i c e towa r d s t h e e q u i l i b r i u m .

Moving from
 I f a f i r m s ets t h e p r i c e a b ove t h e e q u i l i b r i u m
market l eve l , i t wi l l n o t s e l l a l l o f t h e p r o d u cts i t o f f e r s
f o r s a l e - t h e r e wi l l b e a s u r p l u s ( exc e s s s u p p l y ) .

disequilibrium
 To e n s u r e t h e f i r m s e l l s a l l o f t h e p r o d u cts i t
to market wa n t s to, i t wi l l l owe r p r i c e u n t i l t h e m a r ket
c l e a r s, wi t h t h e q u a n t i t y d e m a n d e d e q u a l l i n g t h e
equilibrium quantity supplied.
Show the market S

initiall y being in a
state of
disequilibr ium, with
suppl y exceeding
demand
D
Show the market S

initiall y being in a
state of
disequilibr ium, with
suppl y exceeding
demand
D