Equilibrium price
AQA also says:
Spec content: How equilibrium price is determined by supply and demand; How markets supply and demand diagrams can illustrate a producer's revenue.
Students should be able to understand: how supply and demand together determine equilibrium price; why excess demand and excess supply lead to price changes; how to use diagrams to analyse shifts; how to demonstrate revenue on a supply and demand diagram.
Equilibrium Price
The equilibrium price is the price at which the quantity consumers want to buy exactly equals the quantity producers want to sell. At this price the market clears — there is no unsold stock building up and no unsatisfied buyers. It is found at the intersection of the supply and demand curves.
Excess Demand and Excess Supply
- Excess demand (shortage): occurs when price is set below equilibrium. Quantity demanded exceeds quantity supplied — unsatisfied buyers are willing to pay more, driving the price up towards equilibrium.
- Excess supply (surplus): occurs when price is above equilibrium. Quantity supplied exceeds quantity demanded — producers with unsold stock cut prices to sell their goods, driving the price down towards equilibrium.
These self-correcting forces are what make competitive markets tend towards equilibrium — no external intervention is needed.
Effects of Shifts in Supply and Demand
| What changes | Effect on equilibrium price | Effect on equilibrium quantity |
|---|---|---|
| Demand increases (right shift) | Rises | Rises |
| Demand decreases (left shift) | Falls | Falls |
| Supply increases (right shift) | Falls | Rises |
| Supply decreases (left shift) | Rises | Falls |
Revenue on a Supply and Demand Diagram
A producer's total revenue at the equilibrium price is shown by the rectangle formed between the price axis, the quantity axis, P* and Q*. Total revenue = P* × Q*. This is illustrated by the shaded rectangle in the diagram above. When price or quantity changes, the area of this rectangle changes — showing how revenue rises or falls.
Key Takeaways
- Equilibrium price (P*): where quantity demanded = quantity supplied. The market clears.
- Excess demand (price below P*) → price rises. Excess supply (price above P*) → price falls.
- Demand right shift → P↑ Q↑. Supply right shift → P↓ Q↑.
- Revenue = P* × Q* — shown as the rectangle under the equilibrium point on the diagram.