Equilibrium is the state of the market where there is no tendency for either demand or supply to change - i.e quantity demanded is equal to quantity supplied #testanswer
Outline the concept of market equilibrium
Equilibrium Price is the price that clears the market, where the quantity demanded equals the quantity supplied
Changes in the market result in temporary surpluses or shortages which then cause price to change to reach new equilibrium
Occurs through the price mechanism
This is the process by which the forces of demand and supply interact to determine the price of a good or service $\rightarrow$ helps to clear shortages and surpluses within the market
Adam Smith's Invisible Hand theory relates to the unobservable market force that helps the demand and supply of goods in a free market to reach equilibrium automatically
Enabling people to trade freely
Explain the concepts of market clearing, shortages and surpluses
A shortage is where quantity demanded exceeds the quantity supplied
Consumers bid among themselves for the limited goods so the price of the good increases
In the diagram below, we can see that at $P_2$, Quantity supplied is much lower than demanded, so there is a shortage, away from the equilibrium of Pe. One thing missing from the diagram: the area of shortage should be indicated
For this market to clear, for equilibrium to be achieved again, Consumers will bid amongst themselves for the limited supply, increasing the price and leading to a contractionary movement along the demand curve. Because of this, there will be an expansionary movement along the supply curve, achieving market equilibrium again. #testanswer
On the other hand, surplus is when the quantity supplies exceeds the quantity demanded
Firms lower their prices to clear excess stock. The same as the above diagram, but the surplus is above the equilibrium
For this market to clear, Suppliers will lower their prices in order to sell excess stock, leading to a contractionary movement along the supply curve. Due to these lowered prices, there will be increased demand - an expansionary movement along the demand curve. Together, these movements will achieve market equilibrium. #testanswer
Both surplus and shortages occur because prices are either below or above $P_e$. (below for shortage, above for surplus)
Explain the effects of changes in demand and/or supply on market equilibrium, including simultaneous shifts of demand and supply
When there is a one-way shift in demand/supply there will be a temporary shortage or temporary surplus
The market will clear, however
To explain a one-way shift #testanswer
Identify the non-price factor
Does it lead to an increase/decrease - rightward or leftward shift
At original price, compare quantity demanded and supplied of new curve
Identify temporary shortage/surplus
Action taken to clear the market - by the consumers, or the producers
