Equilibrium

• Equilibrium point


  The unique point of intersection where quantity supplied is equal to quantity demanded
• Equilibrium price


  The price at which the quantity of goods demanded is equal to the quantity supplied
• Equilibrium quantity


  The quantity bought and sold at the equilibrium price
• At a price lower than the equilibrium price, there is excess demand (shortage)
• At a price higher than the equilibrium price, there is excess supply (surplus)
• Determination of price and quantity in a free market economy

  1. Combine quantity demanded and quantity supplied at different prices

  2. Analyse excess demand and excess supply at each price

  3. Plot a graph to determine equilibrium point, price and quantity
• Demand function


  Mathematical equation to determine quantity demanded based on price
• Demand function


  • Qd = 30 - 0.5p
  • Qd = 12 - 2p
• Deriving equilibrium price and quantity from demand and supply functions

  1. Set Qd = Qs to find equilibrium price

  2. Substitute equilibrium price into demand function to find equilibrium quantity
• Equilibrium position is the point where quantity demanded equals quantity supplied
• Condition for equilibrium is where quantity demanded equals quantity supplied
• Price


  Monetary unit of measurement or value that facilitates exchange of goods and services
• Price system/mechanism


  System where prices of goods and services are determined by the free interaction of demand and supply in a free market economy
• Functions/importance of the price system

  • Allocates scarce resources
  • Regulates flow of goods and services
  • Determines extent of demand and supply
  • Encourages/discourages consumption
  • Determines factor rewards
• Price lower than equilibrium


  Excess demand (shortage)
• Price higher than equilibrium


  Excess supply (surplus)
• Market forces


  The forces of demand and supply that determine prices in a free market economy
• Prices are determined by the forces of demand and supply
• Factors that determine price of commodities

  • Cost of production
  • Desired profit level
  • Level of competition
  • Government policies
  • Trade union activities
  • Advertising costs
  • Changes in demand and supply
• Price fixing methods


  • Bargaining system
  • Sales by auction
  • Sales by price tags
  • Market forces of demand and supply