1. 4.1.3.5 The determination of equilibrium market prices

2. Bringing market demand and supply curves together
Bringing together market demand and supply creates what economists refer to as a market.
Markets do not require buyers and sellers to physically come together. (business can be conducted over the phone or the internet)
The purpose of a market is to set a price that is acceptable to both buyers and sellers.
In some cases markets are dynamic and prices are determined through a process of ‘haggling’, while others see prices set by the seller and then the decision is left to the buyer whether they wish to trade or not.

3. Market equilibrium
Equilibrium refers to a market position where both demand and supply are equal.
Equilibrium suggests stability in the market.
This market position will remain as long as the factors of demand and the determinants of supply remain unchanged. P S P1 E1 D
QDS1
QDS

4. Market disequilibrium A positive change in the factors of demand and consequences for equilibrium demand and supply and market price.
A positive change in the factors of demand causes the demand curve to shift to the right giving D2
Demand rises from QD1 to QD2
QS remains unchanged at QS1
This creates a situation of excess demand (more demand than supply)
The excess demand puts pressure on prices to rise.
Prices rise from P1 to P2.
The higher price gives an incentive for sellers to supply more, or new firms to enter the market.
QS moves along the supply curve to give QS2.
The excess demand is eliminated.
Equilibrium is restored at E2. P S1 E2 E1 P1 D2 D1
QDS1
QDS

5. Market disequilibrium A negative change in the factors of demand and consequences for equilibrium demand and supply and market price.
A negative change in the factors of demand causes the demand curve to shift to the left giving D2
Demand falls from QD1 to QD2
QS remains unchanged at QS1
This creates a situation of excess supply(more supply than demand)
The excess supply puts pressure on prices to fall.
Prices fall from p1 to p2.
The lower price gives an incentive for sellers to supply less, or firms to leave the market.
Qs moves along the supply curve to give Qs2.
The excess supply is eliminated.
Equilibrium is restored at E2. P S1 E1 P1 E2 D1 D2
QDS1
QDS

6. Market disequilibrium A positive change in the determinants of supply and consequences for equilibrium demand and supply and market price.
A positive change in the determinants of supply causes the supply curve to shift to the right giving S2
Supply rises from QS1 to QS2
QD remains unchanged at QD1
This creates a situation of excess supply (more supply than demand)
The excess supply puts pressure on prices to fall.
Prices fall from P1 to P2.
The lower price gives an incentive for buyers to purchase more or new buyers to enter the market.
QD moves along the demand curve to give QD2.
The excess supply is eliminated.
Equilibrium is restored at E2. P S1 S2 E1 P1 E2 D1
QDS1
QDS

7. Market disequilibrium A negative change in the determinants of supply and consequences for equilibrium demand and supply and market price.
A negative change in the determinants of supply causes the supply curve to shift to the left giving S2
Supply falls from QS1 to QS2
QD remains unchanged at QD1
This creates a situation of excess demand (more demand than supply)
The excess demand puts pressure on prices to rise.
Prices rise from P1 to P2.
The higher price leads to buyers cutting back on their purchases.
QD moves along the demand curve to give QD2.
The excess demand is eliminated.
Equilibrium is restored at E2. P S2 S1 E2 P1 E1 D1
QDS1
QDS