Reaching equilibrium
In a market, price is set where the demand curve and the supply curve cross. At this equilibrium price the quantity that consumers want to buy exactly equals the quantity that producers want to sell, so there is no shortage or surplus.
Key idea
Equilibrium: demand = supply. Above it there is a surplus that pushes price down; below it there is a shortage that pushes price up.
Surpluses and shortages
If price is set above equilibrium, supply exceeds demand, creating a surplus; sellers cut the price to sell stock. If price is below equilibrium, demand exceeds supply, creating a shortage; buyers bid the price up. These pressures move the market back to equilibrium.
Example
If a concert sets ticket prices too low, tickets sell out and a shortage appears. A higher price would clear the market.
How prices change
A shift in either curve changes the equilibrium:
- An increase in demand raises price and quantity.
- A decrease in demand lowers price and quantity.
- An increase in supply lowers price but raises quantity.
- A decrease in supply raises price but lowers quantity.
Remember
- Equilibrium is where demand meets supply.
- Surplus pushes price down; shortage pushes price up.
- A curve shift changes both price and quantity.