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Price Determination | O Level Economics 2281 & IGCSE Economics 0455 | Detailed Free Notes To Score An A Star (A*)

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2.5.1 Market Equilibrium

  • Market Equilibrium occurs when quantity demanded equals quantity supplied at a particular price.
  • This price is known as the equilibrium price, and the quantity is the equilibrium quantity.
Key Definitions:
  • Equilibrium Price: The price at which the quantity demanded by consumers equals the quantity supplied by producers.
  • Equilibrium Quantity: The quantity bought and sold at the equilibrium price.
Demand and Supply Schedules Example:
Price ($) Quantity Demanded Quantity Supplied
10 80 20
20 60 40
30 40 60
40 20 80
  • At $30, demand = supply (40 units). → Equilibrium
Diagrammatic Representation:
  • Demand Curve (D) slopes downward.
  • Supply Curve (S) slopes upward.
  • The intersection point of both curves = Equilibrium (P*, Q*).
  • At this point, there is no surplus or shortage.
Market Forces at Equilibrium:
  • No tendency for price to change.
  • Efficient allocation of resources: every unit that is valued by consumers is being produced.

2.5.2 Market Disequilibrium

  • Market Disequilibrium occurs when quantity demanded does not equal quantity supplied.
  • It creates either a shortage or a surplus.
Disequilibrium Types:
  1. Shortage (Excess Demand):
    • Occurs when price is below equilibrium.
    • Quantity demanded > Quantity supplied.
    • Result: upward pressure on price.
  2. Surplus (Excess Supply):
    • Occurs when price is above equilibrium.
    • Quantity supplied > Quantity demanded.
    • Result: downward pressure on price.
Example Schedule:
Price ($) Quantity Demanded Quantity Supplied Market Situation
10 100 40 Shortage of 60 units
20 80 60 Shortage of 20 units
30 60 60 Equilibrium
40 40 80 Surplus of 40 units
Graphical Illustration:
  • If price is set below equilibrium:
    • Demand curve > Supply curve → shortage.
    • Market reacts by raising price.
  • If price is set above equilibrium:
    • Supply curve > Demand curve → surplus.
    • Market reacts by lowering price.
  • Invisible hand (as described by Adam Smith) moves the market back toward equilibrium.

Effects of Disequilibrium in Real Markets

Situation Consequence for Consumers Consequence for Producers
Shortage Can’t buy enough goods Can raise prices, profit rises
Surplus More choices, lower prices Unsold stock, falling revenue

Causes of Disequilibrium

  • Government intervention:
    • Minimum price (e.g., agricultural price support) → surplus.
    • Maximum price (e.g., rent control) → shortage.
  • Sudden changes in demand or supply:
    • Natural disasters, changes in income, innovation, etc.

Restoration of Equilibrium

  • Shortage:
    • Producers see opportunity to raise prices and increase output.
    • Higher prices reduce demand and encourage supply → restores balance.
  • Surplus:
    • Producers lower prices to sell excess stock.
    • Lower prices increase demand and reduce supply → restores balance.

Exam Tip

  • Always label equilibrium price and quantity clearly on diagrams.
  • In disequilibrium:
    • Show arrows indicating direction of price movement.
  • Use tables + diagrams together to show clear understanding.
  • Link surplus/shortage to real-life examples (e.g., petrol shortages, minimum wage effects).

Written and Compiled By Sir Hunain Zia, World Record Holder With 154 Total A Grades, 7 Distinctions and 11 World Records For Educate A Change O Level And IGCSE Economics Full Scale Course

Hunain Zia

Hunain Zia has previously achieved considerable success in the high-school educational stream, gaining a massive 154 Total A Grades and 7 Major Distinctions, a process in which he broke/ set 11 different world records, including the most A grades ever achieved, most subjects ever appeared in, most distinctions, gaining distinctions across two separate boards (Pearson Edexcel and CAIE) within the same year/ ever, and even 19 hours of constant examination. All records stand intact today. Hunain pursued his Honors Accounting Degree from the prestigious Bentley University, and then completed an LLB (in Honors) from University of London. Currently, he manages multiple social and commercial projects, has founded digital streams and works tirelessly in the education sector.

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