2281 · 2.5
Price determination
The price settles where the amount buyers want equals the amount sellers offer. Too high a price leaves goods unsold and gets cut; too low a price causes queues and gets raised.
Need to know
What you need to know
- Equilibrium price: the price at which quantity demanded = quantity supplied.
- Equilibrium quantity: the amount bought and sold at the equilibrium price.
- On a diagram, equilibrium is where D and S cross; label it E, with P₁ and Q₁ on the axes.
- At equilibrium there is no shortage, no surplus and no pressure for price to change.
Explanation
Price determination
- Equilibrium is the price at which quantity demanded equals quantity supplied.
- Above equilibrium, sellers offer more than buyers want: a surplus, so price falls.
- Below equilibrium, buyers want more than sellers offer: a shortage, so price rises.
- Find it from a table, a diagram or by setting Qd = Qs in equations.