EQUILIBRIUM

                                         EQUILIBRIUM

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 EQUILIBRIUM

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.  It is possible to derive a number of different 

outcomes.