Supply, Demand and Market Equilibrium
Supply, Demand &
Market Equilibrium.
Markets coordinate decentralised decisions through prices. Learn how buyers and sellers interact, why equilibrium changes, and what shortages and surpluses reveal.
Observe
Read the signal.
A price is both an incentive
and a message.
When demand for hotel rooms rises during a festival, the existing price creates excess demand. Higher prices encourage some buyers to withdraw and some suppliers to provide more capacity. Market adjustment coordinates these separate choices.
OBSERVE A MARKET
When a product becomes scarce, which buyers change their behaviour—and which sellers respond?
Think
Separate quantity changes from shifts.
One market contains
two behavioural relationships.
Demand shows quantities buyers are willing and able to purchase at alternative prices, other things equal. Supply shows quantities sellers are willing and able to offer. A price change moves along a curve; income, preferences, technology or input costs shift a curve.
Buyers
Higher price normally reduces quantity demanded.
Sellers
Higher price normally increases quantity supplied.
Coordination
At P*, quantity demanded equals quantity supplied.
Qd = a − bP · Qs = c + dP · Equilibrium: Qd = QsTherefore P* = (a − c)/(b + d), and Q* follows by substitution.
Analyse
Shift the market.
Find the new
market equilibrium.
Demand and supply indices shift the intercepts of the market equations. Move either slider and observe the new equilibrium.
Market-clearing laboratory
INTERACTIVE EQUILIBRIUM
Market conditions
EQUILIBRIUM PRICE€50EQUILIBRIUM QUANTITY50MARKET CONDITIONClears
The benchmark market is in equilibrium.
Apply
Diagnose intervention and shock.
Disequilibrium creates
pressure for adjustment.
A binding price ceiling below equilibrium produces a shortage because quantity demanded exceeds quantity supplied. A binding price floor above equilibrium produces a surplus. The policy question extends beyond the price: allocation, quality, enforcement and distribution also matter.
Population growth
More households increase housing demand at every price.
Demand shifts right: equilibrium price and quantity rise.
Energy-cost increase
Higher input costs reduce the amount firms supply at every price.
Supply shifts left: equilibrium price rises and quantity falls.
Decide
Test market adjustment.
What follows from a
binding price ceiling?
The equilibrium rent is €700 per month. A legal maximum rent of €500 is imposed and enforced.
MODULE 06 · CHECKPOINT
You can now read
a market.
Supply and demand translate decentralised choices into equilibrium. Shocks shift curves; prices guide adjustment; controls can create shortages or surpluses.
