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Market Equilibrium

Find the price where quantity demanded equals quantity supplied.

  • Define and explain Market Equilibrium in your own words
  • Use key terms such as equilibrium accurately
  • Apply what you have learned to new examples and questions
  • Avoid the common mistakes learners make with this topic

This lesson focuses on Market Equilibrium: find the price where quantity demanded equals quantity supplied.

Definition: Market Equilibrium

Find the price where quantity demanded equals quantity supplied.

Key ideas

Equilibrium and shifts

Where the demand and supply curves cross is the equilibrium: the market clears. If demand rises — say a heatwave boosts ice-cream demand — the curve shifts right, pushing price and quantity up to a new equilibrium. Surpluses push prices down; shortages push them up.

Elasticity shapes pricing

Demand for luxuries with many substitutes, like restaurant meals, tends to be price elastic: a small price rise causes a big fall in quantity. Necessities like bread are inelastic. Firms use this insight: raising prices increases revenue only when demand is inelastic.

Key term — equilibrium: The price and quantity where quantity demanded equals quantity supplied. At this point the market clears, with no shortage or surplus.

Worked example: Market Equilibrium

At equilibrium, what is true about quantity demanded and quantity supplied?

They are equal — the market clears with no shortage or surplus.

Answer: They are equal — the market clears with no shortage or surplus.

Common mistakes
  • Claiming markets reach equilibrium instantly Prices can be sticky and information imperfect, so real markets may stay in disequilibrium for a while.
  • Dropping the minus sign on PED PED is normally negative because price and quantity move in opposite directions — keep the sign, or compare the absolute value with 1.

Practice

If price rises and quantity demanded barely changes, is demand elastic or inelastic?
Weak reaction means…

Inelastic.

A good's price rises 10% and quantity demanded falls 25%. Calculate PED.
%ΔQ ÷ %ΔP.

PED = −25 ÷ 10 = −2.5 (elastic).

A tax is placed on sugary drinks. Using demand and supply, what happens to price and quantity?
Think about a shift.

The tax shifts supply left (up): equilibrium price rises and quantity falls.

Why might a firm with inelastic demand raise its prices?
Think about revenue.

Because quantity falls only slightly, so total revenue rises.

Quick check

Market Equilibrium — quick check

Which of these best defines "equilibrium"?

The price and quantity where quantity demanded equals quantity supplied. At this point the market clears, with no shortage or surplus.

Give one example of a negative externality.

Any one of: factory air pollution, traffic congestion, noise from building work, cigarette smoke.
Key takeaways
  • Market Equilibrium: find the price where quantity demanded equals quantity supplied.
  • Equilibrium and shifts: Where the demand and supply curves cross is the equilibrium: the market clears.
  • price elasticity of demand: A measure of how much quantity demanded changes when price changes.
  • Watch out for: claiming markets reach equilibrium instantly
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