where the supply and demand curves meet

equilibrium price: P where QD = QS

equilibrium quantity:Q where QD = QS

shortage QD exceeds QS

fix: P

surplus QS exceeds QD

fix: P

QD exceeds QS

fix: P

0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

Quantity (tonnes: 000s)

E

D

C

B

Aa

b

c

d

e

Supply

Demand

Pri

ce (

pen

ce p

er k

g)

SHORTAGE

(300 000)

0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

Quantity (tonnes: 000s)

E

C

B

Aa

b

c

e

Supply

Demand

Pri

ce (

pen

ce p

er k

g)

D dSURPLUS

(330 000)

Price (£)

Quantity Bought and Sold (000s)

S

D

£5

600

D1

300

Surplus

£3

450

A shift in the demand curve to the left will reduce the demand to 300 from 500 at a price of £5. Suppliers do not have the information or time to adjust supply immediately and still offer 600 for sale at £5. This results in a market surplus (S > D)

In an attempt to get rid of surplus stock, producers will accept lower prices. Lower prices in turn attract some consumers to buy. The process continues until the surplus disappears and equilibrium is once again reached.

The MarketPrice (£)

Quantity Bought and Sold (000s)

S

D

£5

600

S1

100

Shortage

£8

350

A shift in the supply curve to the left would lead to less products being available for sale at every price. Suppliers would only be able to offer 100 units for sale at a price of £5 but consumers still desire to purchase 600. This creates a market shortage. (S < D)

The shortage in the market would drive up prices as some consumers are prepared to pay more. The price will continue to rise until the shortage has been competed away and a new equilibrium position has been reached.

price floorsets min. P above PE

price ceilingsets max. P below PE