top of page
IB-Econ-Flow-logo

Market Equilibrium

Press for different diagrams

Competitive Market Equilibrium

Changes in Demand & the New Equilibrium Price and Quantity

Changes in Supply & the New Equilibrium Price and Quantity

Price as a Signal & Incentive

Competitive Market Equilibrium

Diagram Explanations: 

  • When demand = supply -> quantity demanded equals to  quantity supplied (Qd = Qs) -> no shortages or surplus -> market clears -> resulting market equilibrium with equilibrium price Pe and equilibrium quantity Qe

​

  • When demand > supply -> quantity demanded exceeds quantity supplied (Qd > Qs) -> shortage occurs

​

  • When demand < supply -> quantity supplied exceeds quantity demanded (Qs > Qd) -> surplus occurs

Changes in Demand & the New Equilibrium Price and Quantity

Increase in Demand:

Diagram Explanations: 

  • Initially, the mkt equilibrium is at point a where D1 intersects S, resulting in equilibrium price and quantity P1 and Q1

 

  • Consider a change in determinants causes a leftward shift of the demand curve from D1 to D2 → at original price P1, movement from point a to point b

​

  • Point b represents disequilibrium as quantity demanded exceeds quantity supplied → shortage created → exerts upward pressure on price

 

  • Therefore, price increases from P1 to P2 → a higher price signals consumers & producers that market condition has changed → signals consumers that goods are less affordable & producers that production is more profitable now → incentivizes consumers to buy less & producers to produce more

​

  • As a result, less quantity demanded → point b moves to point c as excess demand is removed → new equilibrium reached

​

  • New equilibrium point c with equilibrium price and quantity P2 and Q2

Decrease in Demand:

Diagram Explanations: 

  • Initially, the mkt equilibrium is at point a where D1 intersects S, resulting in equilibrium price and quantity P1 and Q1

 

  • Consider a change in determinants causes a leftward shift of the demand curve from D1 to D3 → at original price P1, movement from point a to point b

​

  • Point b represents disequilibrium as quantity supplied exceeds quantity demanded → surplus created → exerts downward pressure on price

 

  • Therefore, price decreases from P1 to P3 → a lower price signals consumers & producers that market condition has changed → signals consumers that goods are more affordable & producers that production is less profitable now → incentivizes consumers to buy more & producers to produce less

​

  • As a result, less quantity supplied → point b moves to point c as excess supply is removed → new equilibrium reached

​

  • New equilibrium point c with equilibrium price and quantity P3 and Q3

Changes in Supply & the New Equilibrium Price and Quantity

Increase in Supply: 

Diagram Explanations: 

  • Initially, the mkt equilibrium is at point a where S1 intersects D, resulting in equilibrium price and quantity P1 and Q1

 

  • Consider a change in determinants causes a rightward shift of the supply curve from S1 to S2 → at original price P1, movement from point a to point b

​

  • Point b represents disequilibrium as quantity supplied exceeds quantity demanded → surplus created → exerts downward pressure on price

 

  • Therefore, price decreases from P1 to P2 → a lower price signals consumers & producers that market condition has changed → signals consumers that goods are more affordable & producers that production is less profitable now → incentivizes consumers to buy more & producers to produce less

​

  • As a result, less quantity supplied → point b moves to point c as excess supply is removed → new equilibrium reached

​

  • New equilibrium point c with equilibrium price and quantity P2 and Q2

Decrease in Supply:

Diagram Explanations: 

  • Initially, the mkt equilibrium is at point a where S1 intersects D, resulting in equilibrium price and quantity P1 and Q1

 

  • Consider a change in determinants causes a leftward shift of the supply curve from S1 to S3 → at original price P1, movement from point a to point b

​

  • Point b represents disequilibrium as quantity demanded exceeds quantity supplied → shortage created → exerts upward pressure on price

 

  • Therefore, price increases from P1 to P3 → a higher price signals consumers & producers that market condition has changed → signals consumers that goods are less affordable & producers that production is more profitable now → incentivizes consumers to buy les & producers to produce more

​

  • As a result, more quantity supplied → point b moves to point c as excess demand is removed → new equilibrium reached

​

  • New equilibrium point c with equilibrium price and quantity P3 and Q3

Price as a Signal & Incentive

Diagram Explanation:

bottom of page