Market Equilibrium & Price Mechanism

The conditions of demand (topic 4) and supply (topic 5) can change at any time. Any shift in either curve moves the equilibrium price and quantity. There are four basic cases.

Two patterns to memorise:

• A shift in demand moves price and quantity in the same direction (both up or both down).
• A shift in supply moves price and quantity in opposite directions.

A seven-step structure for "analyse" questions

Most "analyse the effect of X on the equilibrium" questions are worth 4–6 marks. The mark scheme rewards a systematic walkthrough. The structure works for any shift in any market.

Step 1. Decide which side of the market the scenario affects: demand or supply.

Step 2. State which curve shifts and in which direction (e.g. "D shifts right from D₁ to D₂").

Step 3. At the original price, name the disequilibrium that now exists (surplus or shortage).

Step 4. State whether sellers raise or lower the price to clear the disequilibrium.

Step 5. Explain the contraction or extension of the other curve that follows the price change.

Step 6. Identify the new equilibrium (P₂, Q₂).

Step 7. Compare the new equilibrium to the original and conclude whether price and quantity have ended up higher or lower.

Example — A new technology cuts the unit cost of producing solar panels. Analyse the effect on the equilibrium price and quantity in the solar-panel market.

• Step 1: this change affects the supply side (a fall in production costs).
• Step 2: the supply curve shifts right (S → S₁); at every price, producers offer more.
• Step 3: at the original price, quantity supplied now exceeds quantity demanded; there is a surplus.
• Step 4: sellers lower the price to clear the surplus.
• Step 5: as the price falls, quantity demanded extends (movement down the demand curve) and quantity supplied contracts (movement back down the new supply curve).
• Step 6: the new equilibrium is at a lower price and a higher quantity (P₂ < P₁, Q₂ > Q₁).
• Step 7: outcome. The price of solar panels falls and the quantity sold rises.

When both demand and supply shift

If both curves shift at the same time, one of the two equilibrium effects becomes ambiguous and depends on the relative size of the two shifts.

The IGCSE syllabus only occasionally requires both-curve analysis, but the rule is: one of P or Q is determined; the other is "ambiguous" and depends on relative shift size.