Market equilibrium
- The equilibrium price is where the quantity demanded equals the quantity supplied. It is shown where the demand and supply curves cross.
- At this price, the market "clears": there is no shortage or surplus.
Shortages and surpluses
- If the price is above equilibrium, there is excess supply (a surplus). Firms cut prices until equilibrium is reached.
- If the price is below equilibrium, there is excess demand (a shortage). Prices rise until equilibrium is reached.
Shifts and new equilibrium
- An increase in demand (demand shifts right) raises both the equilibrium price and quantity.
- A decrease in demand lowers both.
- An increase in supply (supply shifts right) lowers the price and raises the quantity.
- A decrease in supply raises the price and lowers the quantity, such as when bad weather cuts a harvest.
Key terms
- Equilibrium price
- The price where quantity demanded equals quantity supplied.
- Excess supply
- When quantity supplied is greater than quantity demanded (a surplus).
- Excess demand
- When quantity demanded is greater than quantity supplied (a shortage).
- Market clearing
- When all goods offered for sale are bought.
- Equilibrium quantity
- The quantity bought and sold at the equilibrium price.