Market Equilibrium & Price Mechanism
Allocation of Resources · 4 question types
Exam Frequency Analysis
Past paper frequency (2018 to 2024)
This topic accounts for approximately 16% of your exam marks.
Equilibrium price, surplus/shortage, and price mechanism analysis are core Section B content; tested in most Paper 2 sittings.
A demand-and-supply schedule is a table that lists, for each price, the quantity demanded and the quantity supplied. The equilibrium price is the row where the two columns are equal.
Take this schedule for the market in bicycle helmets:
| Price ($) | Quantity demanded (thousand units) | Quantity supplied (thousand units) |
|---|---|---|
| 10 | 90 | 30 |
| 20 | 75 | 45 |
| 30 | 60 | 60 |
| 40 | 45 | 75 |
| 50 | 30 | 90 |
Notice the shape of the two quantity columns: as the price rises, quantity demanded falls and quantity supplied rises, exactly as the demand and supply curves in topics 4 and 5 predict.
Finding the equilibrium. Look for the single row where the two quantity columns are equal. Here that is the $30 row, where Qd = Qs = 60. So the is $30 and the is 60 thousand units. A schedule question usually asks for both, so always give the price and the quantity.
A row below the equilibrium price gives a . At $20, quantity demanded (75) is greater than quantity supplied (45), so the market is in disequilibrium. The size of the shortage is the gap between the two columns:
shortage = Qd − Qs = 75 − 45 = 30 thousand units
Buyers compete for the limited stock, so the price rises from $20 toward $30 and the shortage is eliminated.
A row above the equilibrium price gives a . At $50, quantity supplied (90) is greater than quantity demanded (30), so sellers are left with stock they cannot sell:
surplus = Qs − Qd = 90 − 30 = 60 thousand units
Sellers cut the price to shift that stock, so the price falls from $50 back toward $30.
This is the same story as section 3, told in numbers instead of curves. A row below the equilibrium row is the excess-demand diagram and a row above it is the excess-supply diagram, so whichever form a question uses, the rule is unchanged: price below equilibrium gives a shortage, price above equilibrium gives a surplus.