IGCSE Economics 2.2 Market Equilibrium

Learning Outcomes Describe the causes of changes in demand and supply conditions and analyse such changes to show effects in the market

What is Market Equilibrium? When demand and supply are combined there is a tendency for them to reach an equilibrium state Market Equilibrium is defined as: ‘The state in which the quantity supplied is equal to the quantity demanded’ The price level at which this happens is called the market clearing price

Task Draw a fully labelled diagram which shows a supply curve AND a demand curve

Market Equilibrium Quantity Price S D PePe QeQe

DISEQUILIBRIUM

Disequilibrium Disequilibrium is a situation where demand doesn’t equal supply

Question… What would happen if the price was set ABOVE the equilibrium price? Show this in a diagram…..

Excess Supply Quantity Price S D PePe QeQe P1P1 Excess Supply (Surplus) There is now an excess of supply What is likely to happen?

What will happen? Producers now have too much stock (Excess of supply/surplus)) The only way they can sell this is to reduce the price As they do this demand will increase The gap will be narrowed until the surplus is reduced to zero and the equilibrium price is reached

Prices will fall until equilibrium is reached Quantity Price S D PePe QeQe P1P1 Excess Supply (Surplus)

Question… What would happen if the price was set BELOW the market price

Excess Demand Quantity Price S D PePe QeQe P1P1 Excess Demand (Shortage) There is now an excess of demand What is likely to happen?

What will happen? Suppliers realise that they can charge a higher price They will produce more but will increase the price gradually As they do this, consumers start to drop out of the market and demand is gradually lowered The gap will be narrowed until the surplus demand is reduced to zero and the equilibrium price is reached

Prices will increase until equilibrium is reached Quantity Price S D PePe QeQe P1P1 Excess Demand (Shortage)

Video Watch the Video Episode 14 – Market Equilibrium

CHANGES IN SUPPLY AND DEMAND

Introduction The tendency towards market equilibrium is strong When the markets are in balance it usually requires some external force to change them Shifts in supply or demand will change the market equilibrium There will be a new equilibrium price and equilibrium quantity

LOOKING AT SHIFTS IN DEMAND AND SUPPLY – FILL IN YOUR TABLES AS WE GO THROUGH THEM

There has been a decrease in consumers incomes. How will this affect the new car market? Will the demand or the supply curve be affected? Will this be a shift to the left or a shift to the right? What will happen to the equilibrium price and quantity?

A Decrease in Demand Price Quantity 0 S p q D D1 p1 q1 A shift to the left of the demand curve will decrease equilibrium price and decrease equilibrium quantity

Explanation….. The demand curve will shift to the left from D to D1 as cars are a normal/luxury good As a result the market price will decrease from P to P1 Suppliers will now be less willing to supply at this new price so there will be a contraction of supply The market quantity will decrease from Q to Q1

Discovery of synthetic rubber makes the production of rubber ducks much cheaper Will the demand or the supply curve be affected? Will this be a shift to the left or a shift to the right? What will happen to the equilibrium price and quantity?

An Increase in Supply Price Quantity0 S p q D S1 p1 q1 A shift to the right of the supply curve will decrease equilibrium price and increase equilibrium quantity

Explanation The supply curve will shift to the right from S to S1 as costs of production are decreased The market price will decrease from P to P1 As a result there will be an extension of demand The market quantity will increase from Q to Q1

Bad weather in Greece and Cyprus damage orange crops Will the demand or the supply curve be affected? Will this be a shift to the left or a shift to the right? What will happen to the equilibrium price and quantity?

A Decrease in Supply Price Quantity 0 S p q D S1 p1 q1 A shift to the left of the supply curve will increase equilibrium price and decrease equilibrium quantity

Explanation The supply curve will shift to the left from S to S1 as the supply of oranges is restricted The market price will increase from P to P1 As a result there will be a contraction of demand The market quantity will decrease from Q to Q1

It is reported that pomegranate juice contains high levels of healthy antioxidants Will the demand or the supply curve be affected? Will this be a shift to the left or a shift to the right? What will happen to the equilibrium price and quantity?

An Increase in Demand Price Quantity 0 S p q DD1 p1 q1 A shift to the right of the demand curve will increase equilibrium price and increase equilibrium quantity

Explanation The demand curve will shift to the right from D to D1 as customers will want to buy more of the healthy drink The market price will increase from P to P1 As a result there will be an extension of supply and market quantity will increase and from Q to Q1

For each of the headlines below explain the change in equilibrium price and quantity with the aid of a diagram

Peer marking Use the grids to give a mark out of 6 3 marksCorrectly labelled diagram Axis and curves are correctly labelled Correct shift/change is shown Original and new equilibrium price and quantity labelled Up to 3 marks All – 3 marks Most – 2 marks Some – 1 mark Inappropriate/incorrect answer – 0 marks Explanation Refers to diagram Correctly identifies and explains how the market price will change Correctly identifies and explains how the market quantity will change Uses subject specific terminology

Extension Activity Read the article Explain with the aid of a diagram why the price of coffee has increased