1.2.3 Markets - syllabus
Students should be able to:
• Describe equilibrium price and quantity
and explain how they are determined
• Draw, and interpret, a diagram showing
the interaction of supply and demand
• Show that shifts in demand and supply
curves will change equilibrium
• Analyse the causes and consequences
of price changes
Markets
Bringing buyers (demanders) and sellers
(suppliers) together creates a _________
Markets do not require buyers and sellers
to physically meet (e.g. internet selling).
Their purpose is to set a price that is
acceptable to both buyers and sellers.
Demand and supply
In order to analyse how a market works we
need to look at demand and supply curves
on the same diagram.
The demand curve slopes downwards,
indicating that more will be purchased as
price falls, while the supply curve slopes
upwards, indicating that more sellers enter
the market as prices rise.
Draw a demand and supply curve on the
same graph.
Market equilibrium
The price system should produce
equilibrium where demand and supply are
equal. This occurs at the equilibrium price.
When does equilibrium occur?
The equilibrium price is also known as the
market clearing price.
Disequilibrium
When a market is not in equilibrium
(disequilibrium), then there will probably be
a reaction by buyers or sellers.
At a high price P1, the supply OA exceeds
demand OB and suppliers will not be able
to sell all they have produced at this price.
This is known as excess supply as supply
exceeds demand and if suppliers want to
sell the product then they will have to
_______ the price.
Market clearing price
This situation is often referred to as a ‘glut’
and there is pressure on the price to fall.
As the price falls demand will extend down
the demand curve and supply will contract
down the supply curve until they meet at
price OP and quantity OQ.
At this price, demand and supply are equal
and it is known as the equilibrium or
market-clearing price.
Excess demand
Similarly, at a low price of P2 demand OE
exceeds supply OF.
This is a condition of excess demand.
This is a disequilibrium position where
suppliers will sell out of stock very rapidly
and there will be a shortage.
The pressure on price is to rise in these
circumstances and price is performing all
three of its functions.
Movement or shift recap?
Draw a demand and supply curve.
What will cause a movement along the
curves?
What will cause a curve to shift?
Demand and supply question
Price
Demand
Supply
1
900
500
2
800
600
3
700
700
4
600
800
5
500
900
Plot this, where is equilibrium?
Summary – market mechanism
So the market mechanism is the process
by which market forces determine prices.
The market mechanism can:
 cause supply to respond to changes in
demand
 eliminate excess supply and demand
 signal changes in consumer tastes
However it won’t necessarily ensure a fair
distribution of all goods.