1.2.3 markets

• interaction of supply and demand


  equilibrium is where supply and demand are equal. the price is set where both consumers and producers are happy
• supply and demand

  if price was set above equilibrium, supply would be greater than demand and there would be a surplus.

  if price was below equilibrium demand would be greater than supply and there would be a shortage
• effect of changes in demand on the equilibrium price

  an increase in demand will cause a shift in demand curve to the right from D to D1

  *equilibrium price has now changed

  price has been forced up from P to P1 - prices will rise

  quantity sold in the market has gone up from P to P1
• what would happen if demand were to fall?

  • producers forced to lower prices
  • demand curve would shift to left from D to D2
  • price would fall from P to P2
• changes in supply

  a change in supply will also affect equilibrium price

  if supply decreases, price of goods will rise as there is a shortage

  supply curve will shift to the left from S to S1

  price rises from P to P1
• what would happen if supply increases?

  • curve shifts to the right
  • suppliers forced to lower prices from P to P2
  • quantity sold at the market has gone up to Q2