1.1.3 Demand, supply and market equilibrium

Demand

a) Definition of demand.

Definition: Demand is the willingness and ability to purchase a good or service at a given price over a period of time.

b) The use of a demand curve diagram to show:

  • Changes in price causing movements along a demand curve

  • Shifts indicating increased and decreased demand.

c) Factors that may cause a shift in the demand curve:

  • Advertising

  • Income

  • Fashion and tastes

  • Price of substitute goods

  • Price of complementary goods

  • Demographic changes.

Supply

d) Definition of supply.

Definition: Supply is the willingness and ability to sell a good or service at a given price over a period of time.

e) The use of supply curve diagram to show:

  • Changes in price causing movements along a supply curve

  • Shifts indicating increased and decreased supply.

Market Equilibrium

g) Equilibrium price and quantity and how they are determined.

Definition: Equilibrium price is the price at which quantity supply and quantity demanded are equal.

Definition: Equilibrium quantity is the amount bought and sold in the market at the equilibrium price.

  • Equilibrium is determined at the point where the demand and supply curves intersect in a market.

h) The use of diagrams to show:

  • How shifts in supply and demand affect equilibrium price and quantity in real-world situations

  • Excess demand

  • Excess supply

i) Define, calculate and draw excess demand and excess supply.

Excess Demand (Shortage)

Definition: Excess demand is when quantity demanded exceeds quantity supplied at a given price.

Formula: Excess Demand = Quantity Demanded - Quantity Supplied

Excess Supply (Surplus)

Definition: Excess supply is when quantity supplied exceeds quantity demanded at a given price.

Formula: Excess Supply = Quantity Supplied - Quantity Demanded

j) The use of market forces to remove excess supply or excess demand.

Excess Demand: Sellers raise prices, decreasing demand and increasing supply to re-establish equilibrium.

Excess Supply: Producers reduce prices, increasing demand and decreasing supply until equilibrium is restored.

Two graphs showing demand curves and price levels with shifts, illustrating price and quantity changes.
Two supply and demand graphs, one showing an increase in supply shifting the curve from S to S1, leading to lower prices and higher quantity. The other shows a shift in demand affecting price and quantity.
Graph showing the relationship between gasoline quantity in millions of gallons and price per gallon, with labels for excess supply or surplus, equilibrium price, excess demand or shortage, and above- and below-equilibrium prices.
Graph illustrating excess demand with supply and demand curves, showing a shortage where quantity demanded exceeds quantity supplied.
Graph labeled 'Excess Supply' showing supply and demand curves, with price levels P, P2, and P*; excess supply area highlighted between Qd and Qs; intersection point at Q*.

Movement:

Movement:

Shift:

Shift: