What this lesson teaches
I can find the equilibrium price and quantity where demand meets supply.
Syllabus 8843, 2.1.2(e). Demand and Supply Analysis and its Applications: The equilibrium market price and quantity are determined by the interaction of demand and supply
Make a guess
At the current price, buyers want 500 concert tickets but only 300 are on sale. What happens to the price if the seller is free to change it?
- It stays the same, because 300 tickets will sell out.
- It rises until quantity demanded equals quantity supplied.
- It falls, because the seller wants to sell all 300 tickets.
Show the answer
It rises until quantity demanded equals quantity supplied.
There is a shortage of 200. Sellers can charge more; as the price rises, some buyers drop out and more tickets are offered, until the shortage is gone.
A shortage pushes the price up and a surplus pushes it down, until the market clears.
Equilibrium is the price where quantity demanded equals quantity supplied. At that price there is no pressure for the price to change.
If the price is below equilibrium, buyers want more than sellers offer. This is a shortage. Queues form and sellers realise they can charge more, so the price rises.
As the price rises, quantity demanded falls and quantity supplied rises, both along their curves, until the shortage disappears.
A surplus works the other way. Unsold stock builds up, sellers cut prices, and the market moves back to equilibrium.
Expectations can stop a shortage from clearing. If buyers expect prices to keep rising, they buy now rather than later, so demand shifts right. If sellers expect higher prices, they hold back stock to sell later, so supply shifts left. Each rise in price confirms the expectation, and the shortage can last.
In February 2020, after Singapore raised its DORSCON alert to orange, shoppers expecting shortages rushed to buy rice, instant noodles and toilet paper, and some supermarket shelves emptied. Once restocking showed supplies were secure, buying returned to normal.
- Equilibrium
- Quantity demanded equals quantity supplied.
- Shortage
- Price below equilibrium; the price rises.
- Surplus
- Price above equilibrium; the price falls.
- Expectations
- Expected price rises shift demand right and supply left, so a shortage can last.
Worked example: Too few lunches at $4
At $4 a lunch, office workers want 120 lunches a day but the food stall prepares only 80. At $5, both are 100.
- At $4 there is a shortage of 120 - 80 = 40 lunches.
- The stall sells out early and sees queues, so it raises the price.
- As the price rises, some buyers go elsewhere (quantity demanded falls) and the stall prepares more (quantity supplied rises).
- At $5, quantity demanded equals quantity supplied at 100. The shortage is gone.
Watch out for this
A shortage makes demand fall and supply rise.
The curves do not shift. The rising price causes movements along them: quantity demanded falls and quantity supplied rises.
Check your understanding
At the current price, sellers offer 150 units and buyers want 90. What happens next?
- There is a shortage of 60, so the price rises.
- There is a surplus of 60, so the price falls.
- The demand curve shifts right to absorb the extra units.
Show the answer
There is a surplus of 60, so the price falls.
Right. Unsold stock pushes sellers to cut prices until the market clears.