In simple terms
A friendly intro before the formal notes — no formulas yet.
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.
A market stall at closing time: fruit left over means the price was too high and it gets marked down; a stall that sold out by noon could have charged more. Over the weeks the price drifts to where the stall sells out just as it closes.
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Equilibrium is the price at which quantity demanded equals quantity supplied.
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Above equilibrium, sellers offer more than buyers want: a surplus, so price falls.
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Below equilibrium, buyers want more than sellers offer: a shortage, so price rises.
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Find it from a table, a diagram or by setting Qd = Qs in equations.
Explore the concept
Use the live diagram, PhET or GeoGebra sim, and synced steps — play it, drag controls, or tap a step.
Step-synced diagram — highlights what to look for in the simulation above.
At a glance — side by side
Compare key properties side by side — ideal for exam contrasts.
Surplus and shortage compared
| Feature | Surplus (excess supply) | Shortage (excess demand) |
|---|---|---|
| Price relative to equilibrium | Above equilibrium | Below equilibrium |
| Quantities | Quantity supplied is greater than quantity demanded | Quantity demanded is greater than quantity supplied |
| What people notice | Unsold stock, discounts, empty tills | Queues, empty shelves, waiting lists |
| How price moves | Falls as sellers cut prices to clear stock | Rises as sellers find they can charge more |
| Adjustment along the curves | Demand extends, supply contracts | Demand contracts, supply extends |
Price relative to equilibrium
Surplus (excess supply)
Shortage (excess demand)
Quantities
Surplus (excess supply)
Shortage (excess demand)
What people notice
Surplus (excess supply)
Shortage (excess demand)
How price moves
Surplus (excess supply)
Shortage (excess demand)
Adjustment along the curves
Surplus (excess supply)
Shortage (excess demand)
Full topic notes
Formal explanation with the rigour you need for the exam.
Equilibrium price and quantity
The equilibrium price (also called the market-clearing price) is the price at which the quantity demanded equals the quantity supplied. The quantity traded at that price is the equilibrium quantity. On a diagram it is the point where the demand and supply curves intersect; in a schedule it is the row where the two quantity columns match.
At equilibrium there is no pressure on the price to change. Every buyer willing to pay the price finds a seller, and every seller willing to accept it finds a buyer. The market "clears" — nothing is left unsold and no one who wants to buy at that price goes without.
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.
Prices above equilibrium: surplus
If the price is set above equilibrium, producers want to sell more than consumers want to buy. The gap is excess supply, or a surplus. Stock piles up in warehouses and on shelves.
Sellers respond by cutting the price. As price falls, quantity demanded extends (consumers buy more) and quantity supplied contracts (producers offer less), narrowing the gap. The price keeps falling until the surplus is gone — at the equilibrium.
Price above equilibrium → quantity supplied > quantity demanded → surplus (excess supply).
Unsold stock leads sellers to cut prices.
Falling price: demand extends, supply contracts, surplus shrinks.
The process stops at the equilibrium price.
Draw the surplus as a horizontal gap between the two curves at the higher price, and label it. Then add an arrow down the vertical axis to show the price falling. The diagram does half the explaining.
Prices below equilibrium: shortage
If the price is below equilibrium, consumers want to buy more than producers are willing to sell. The gap is excess demand, or a shortage. Queues form, shelves empty, and some buyers go without.
Sellers see that they can raise the price and still sell everything. As price rises, quantity demanded contracts and quantity supplied extends, closing the gap. The price keeps rising until the shortage disappears — again at the equilibrium.
Price below equilibrium → quantity demanded > quantity supplied → shortage (excess demand).
Queues and sell-outs lead sellers to raise prices.
Rising price: demand contracts, supply extends, shortage shrinks.
Equilibrium is reached from below just as it is from above.
Finding the equilibrium from data
From a schedule, look down the table for the price at which the two quantities are equal. If no row matches exactly, the equilibrium lies between the price with a shortage and the price with a surplus.
From equations, set quantity demanded equal to quantity supplied and solve for P, then substitute P back into either equation to find Q. For example, with Qd = 1 000 − 20P and Qs = −200 + 40P: 1 000 − 20P = −200 + 40P gives 1 200 = 60P, so P = 20 and Q = 1 000 − 400 = 600. Always check by substituting into the other equation.
Schedule: find the row where quantity demanded equals quantity supplied.
Equations: set Qd = Qs, solve for P, substitute to find Q, then check in the other equation.
Diagram: read P and Q from the intersection, with labelled axes.
Show working — method marks are awarded even if the arithmetic slips.
Paper 1 tests equilibrium with a schedule and asks which price gives a shortage or a surplus. Compare the two quantity columns row by row: demand bigger = shortage, supply bigger = surplus.
Worked examples
See the formulas applied — reveal one step at a time, like the exam.
The table shows the weekly market for pizzas in a town.
| Price ($) | Quantity demanded | Quantity supplied |
|---|---|---|
| 4 | 900 | 300 |
| 6 | 700 | 500 |
| 8 | 600 | 600 |
| 10 | 500 | 700 |
| 12 | 400 | 800 |
(a) State the equilibrium price and quantity. (b) Describe what happens if pizzerias charge $12. (c) Describe what happens if pizzerias charge $6.
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Step 1 — Equilibrium (a): where quantity demanded equals quantity supplied → $8 and 600 pizzas per week.
The market for a popular brand of headphones has the following demand and supply equations, where P is the price in dollars:
Demand: Qd = 2 000 − 10P Supply: Qs = 500 + 5P
(a) Calculate the equilibrium price and quantity. (b) If the price is set at $80, calculate the resulting disequilibrium and state whether it is a shortage or a surplus. (c) Explain how the market would move back to equilibrium.
- 1
Step 1 — Equilibrium (a): 2 000 − 10P = 500 + 5P → 1 500 = 15P → P = $100. Quantity = 2 000 − 10(100) = 1 000 headphones. Check: Qs = 500 + 500 = 1 000.
How it all connects
The big idea sits in the middle — tap a linked idea to explore the link.
Tap a linked idea to see how it connects back to the main topic — that connection is what examiners reward.
Glossary
Key terms for this topic — skim now; the Check step will test them.
- equilibrium price
The equilibrium price (also called the market-clearing price) is the price at which the quantity demanded equals the quantity supplied.
- extends
As price falls, quantity demanded extends (consumers buy more) and quantity supplied contracts (producers offer less), narrowing the gap.
- Equilibrium quantity
The quantity bought and sold at the equilibrium price.
- Surplus
Excess supply: at the current price the quantity supplied is greater than the quantity demanded.
- Shortage
Excess demand: at the current price the quantity demanded is greater than the quantity supplied.
- Market-clearing price
Another name for the equilibrium price — the price at which everything offered for sale is bought.
Sort it out
One statement at a time, say which heading it belongs under. Every statement comes from this lesson’s side-by-side comparison.
Rises as sellers find they can charge more
Quick check
Write your answer first, then compare it with the model one — the gap is what you would have lost.
Teach it back
If you can explain it simply, you own it — gaps here are marks you’d lose.
Teach it back
Explain this topic as if teaching a friend. We name the gaps an examiner would still dock.
Revision flashcards
Guess first, then flip — retrieval beats re-reading.
Key takeaways
Review these before you close the topic — retrieval beats re-reading.
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.
Practice — then mark it
The whole point: a real Cambridge question, marked mark-by-mark.
Mark a price determination question
Mark a price determination question
Extra simulations & links
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Frequently asked
Checkpoint
One marked question is worth ten re-reads — close the loop before you move on.
Reading it isn’t knowing it — prove it.
Before you move on: do Mark a price determination question on paper, snap a photo, and get examiner-style feedback on exactly where you win and lose marks.
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