Yr 11 IB ECON 2011 WK 4: lesson 3 , 2/10 2012
MARKET EQUILIBRIUM
Market Equilibrium - refers to the situation where P____ and O_____ are determined
through the interaction of demand and supply.
When the quantity demanded of a good or service is ________to the quantity supplied of
that good or service, then market equilibrium price and quantity are established.
HOW IS MARKET EQUILIBRIUM ACHIEVED?
The tendency for market to reach equilibrium point is caused by the forces of
demand and supply responding to any imbalances by a price adjustment process
known as the price mechanism.
The Price Mechanism - refers to the interplay of the forces of demand and supply in
determining the equilibrium price and quantity of final goods and services and the factors
of production in allocating resources to their most productive uses in consumption and
production. The price mechanism operates both in the product (___________) and factor
(___________) markets.
HOW IS MARKET EQUIBRIUM REPRESENTED?
Market Equilibrium may be represented diagrammatically as the point where the demand
curve (D) intersects with the supply curve (S) at point E to establish an equilibrium price
of OPe and equilibrium quantity of OQe. This means at E:
The Quantity Demanded by consumers EQUALS The Quantity Supplied by firms
Equilibrium point is the ideal market condition where there is no tendency for change in
price or quantity and there is no shortage or surplus of goods and services in the market.
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Yr 11 IB ECON 2011 WK 4: lesson 3 , 2/10 2012
Price
S
D < S Surplus
A
P1
B
Pe
E
P2
C
D
Shortage
D
D>S
0
Q1
Qe
Q2
Quantity
WHAT HAPPENS IF THERE IF THERE IS NO EQUILIBRIUM?
If there is a mismatch between demand and supply – the market will equilibrate by a
change in price leading to a change in the quantity demanded or supplied.
If there is a surplus (an excess)
of goods and services (A-B) at
OP1
If there is a shortage of goods
and services (C-D) at price OPe
• The quantity supplied is GREATER than quantity demanded (OQ2 > OQ1 )
•firms will then cut down prices to sell the surplus stock.
•As prices fall from (OP1 to OPe), supply will contract from OQ2 to OQe and consumers
will expand their demand from (OQ1 to OQe) and equilibrium will be reached at price
OPe and quantity OQe.
•the quantity supplied is LESS than quantity demanded ( OQ1 < OQ2) – then
consumers will compete to get the goods and will push the prices up.
•As prices increase from (OP2 to OPe) suppliers will respond by expanding
their supply from (OQ1 to OQe) and consumers will contract their demand
from (OQ2 to OQe) and equilibrium will be reached at price OPe and
quantity OQe.
Surpluses and shortages represent situations of market disequilibria yet they may only be
temporary situations, since changes in prices lead to the re-establishment of market
equilibrium position. This process is also known as market clearing and is an important
adjustment process which makes markets unique.
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Yr 11 IB ECON 2011 WK 4: lesson 3 , 2/10 2012
CHANGES TO MARKET EQUILIBRIUM
Changes to market equilibrium occur through shifts in the demand or the supply curves or
both curves simultaneously (at the same time). These shifts are caused by changes in the
factors or conditions behind demand and supply.
An Increase in Demand (shift to the
_______of the demand curve) leads
to _______ goods and services
being demanded at the same price
and over a range of prices.
An increase in demand from D to D1
in figure 7.2 leads to a ______
equilibrium price OP1 and a _____ in
the quantity demanded from OQ to
OQ1. The new equilibrium is now __.
The increase in demand which leads
to higher prices also causes the
suppliers to ________ their supply
An increase in demand may be caused by:
from OQ to OQ1.

An _____________________________

A ______________________________

An _____________________________

A ______________________________
 A ______________________________
Explain why suppliers are motivated to expand their supply of a good when the
demand increases for this good.
______________________________________________________________
______________________________________________________________
______________________________________________________________
______________________________________________________________
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Yr 11 IB ECON 2011 WK 4: lesson 3 , 2/10 2012
A decrease in Demand (shift to the
______ of the demand curve) leads
to ______ goods and services being
demanded at the same price and
over a range of prices.
A decrease in demand from D to D1
in figure 7.3 leads to a ______
equilibrium price OP1 and a _____ in
the quantity demanded from OQ to
OQ1. The new equilibrium is now __.
The decrease in demand which leads
to ______ prices also causes the
suppliers to ______ their supply
from OQ to OQ1.
A decrease in demand may be caused by:

A _____________________________

A _____________________________

A _____________________________

A _____________________________

A _____________________________

A _____________________________
Explain how a change in the demographic structure of a country such as an aging population
leads to increased demand for certain products?
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
___________________________________________________________________
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Yr 11 IB ECON 2011 WK 4: lesson 3 , 2/10 2012
An increase in Supply (shift to the of
A decrease in Supply (shift to the left
the original supply curve) leads to
of the supply curve) leads to
______________________________
______________________________
______________________________
______________________________
______________________________
______________________________
______________________________
______________________________
______________________________
______________________________
______________________________
______________________________
______________________________
______________________________
______________________________
______________________________
______________________________
______________________________
____
An increase I supply may be caused by:




A ________________________________
An improvement in technology
Positive ____________________________
A _________________________________
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______________________________
______________________________
______________________________
______________________________
______________________________
______________________________
______________________________
______________________________
______________________________
___________________________
A decrease I supply may be caused by:
 An increase in production costs
 An _______________________________
 Negative producer expectation about the
future
 ___________________________________
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