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Equilibrium |
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We can see
on the diagram overleaf there is only one price where planned demand equals
planned supply, this is known as the equilibrium price. This price is also
known as the market clearing price, because all of the goods supplied to the
market are bought (or cleared), but no buyer is left frustrated by his wish
to buy. We can state
that equilibrium occurs when demand equals supply. This can be shown on the
graph where the demand curve crosses the supply curve
In the diagram below the price
is above the equilibrium price. At this price firms are willing to supply
more than consumers demand, giving rise to excess supply. When a shop holds a
sale it implies there has been excess supply in the past, firms tried to sell
the goods at a higher price in the past and failed.
In the diagram overleaf the
price is below the equilibrium price. A this price consumers demand more than
firms are willing to supply, leading to excess demand. This can occur in the
sports car market where there is often a waiting list than can run into
years.
Shifts in demand and supply will cause the equilibrium position to change. In the diagram below demand has increased and shifted to the right. This will lead to an excess demand of a-b, suppliers will realise that they can charge higher prices. Price will keep rising until equilibrium is reached at P2 Q2 at point c. The opposite would occur for a shift in demand to the left.
In the diagram below supply
has decreased and shifted to the left. This will lead to an excess demand of
a-b, the resulting surplus will allow firms to raise their prices. Price will
keep rising until equilibrium is reached at P2 Q2 at
point c. The opposite would occur for a shift in supply to the right.
If demand and supply both
shift the resulting equilibrium will depend upon the size of their relative
shifts.
Notes on the internet |
