Analysing Changes to Market Equilibrium (Cambridge (CIE) A Level Economics): Revision Note

Changes in equilibrium

• A demand and supply schedule shows the quantity demanded and the quantity supplied of a product at different price levels

• Demand and supply schedules can be used to identify equilibrium and disequilibrium

Demand and Supply Schedule Per Week For YEEZY Boost 700 Wave Runner Trainers

• At a price of $500, the market is in equilibrium

  • The QD = QS (800 units)

• At a price of $300 & $400, there is excess demand as the product is more affordable for consumers

  • Producers supply less at lower prices, as they make less profit per unit

  • Producers are incentivised to supply more when prices are higher

• At a price of $600 & $700, there is excess supply, as the high price has eliminated some buyers from the market

  • Producers would love to sell at this high price but in order to clear their stock, they have to lower the price & move towards equilibrium

• Market equilibrium can change every few minutes in some markets (e.g. stocks and shares), or every few weeks or months in others (e.g. clothing)

•  Any change to a determinant of demand or supply will temporarily create disequilibrium and market forces will then seek to clear the excess demand or supply

Changes to demand that increase price

• During lockdowns associated with the Covid-19 pandemic, furniture retailers experienced unexpectedly high demand for their products (especially desks and sofas)

Diagram analysis

• Due to the Covid-mandated change of working from home, consumers experienced a temporary change in taste as they sought to set up comfortable home offices

  • This led to an increase in demand for desks from D₁→D₂

• At the original market clearing price of P₁, a condition of excess demand now exists

  • The demand for desks is greater than the supply

• In response, suppliers raise prices

  • This causes a contraction of demand and an extension of supply, leading to a new market equilibrium at P₂Q₂

  • Both the equilibrium price (P₂) and the equilibrium quantity (Q₂) are higher than before

  • The excess demand in the market has been cleared

Changes to supply that increase price

• Ukraine is one of the world's largest producers of wheat. During the Russian-Ukrainian war, exports of wheat have been halted

• India imported 13% of the nation's wheat requirements from Ukraine

Diagram analysis

• Due to the war in Ukraine, India is experiencing a supply shock in its wheat market

  • This causes a decrease in supply of S₁→S₂

• At the original market clearing price of P₁, a condition of excess demand now exists (shortage)

  • The demand for wheat is greater than the supply

• In response, sellers in India raise prices

  • This causes a contraction of demand and an extension of supply, leading to a new market equilibrium at P₂Q₂

  • The equilibrium price (P₂) is higher and the equilibrium quantity (Q₂) is lower than before

  • The excess demand in the market has been cleared

Changes to demand that decrease price

• Demand for lobsters in Maine, USA, has been falling steadily

• This has resulted in a price fall from $12.35/pound to $9.35/pound in a month

Diagram analysis

• The USA has been experiencing an increasing rate of inflation

  • Inflation lowers the purchasing power of money in a consumer's pocket and so effectively reduces their real income

  • With reduced real income, fewer luxuries are consumed

  • This leads to a decrease in demand for lobsters from D₁→D₂

• At the original market clearing price of P₁, a condition of excess supply now exists

  • The demand for lobsters is less than the supply

• In response, suppliers gradually reduce prices

  • This causes a contraction of supply and an extension of demand, leading to a new market equilibrium in P₂Q₂

  • Both the equilibrium price (P₂) and the equilibrium quantity (Q₂) are lower than before

  • The excess supply in the market has been cleared

Changes to supply that decrease price

• In order to help meet its climate targets and to lower energy costs for households, the EU is providing subsidies for solar panels 

Diagram analysis

• To help meet its climate change targets and lower household energy bills the EU has provided subsidies to solar panel retailers

  • This causes an increase in supply of S₁→S₂

• At the original market clearing price of P₁, a condition of excess supply now exists (surplus)

  • The supply of solar panels is greater than the demand

• In response, sellers in the EU lower prices

  • This causes an extension of demand and a contraction of supply, leading to a new market equilibrium at P₂Q₂

  • The equilibrium price (P₂) is lower and the equilibrium quantity (Q₂) is higher than before

  • The excess supply in the market has been cleared