IB DP Economics - Unit 2 - Demand and supply determining equilibrium-Study Notes - New Syllabus

Demand and Supply Curves Forming Market Equilibrium

Market equilibrium occurs where the demand curve and supply curve intersect. At this point, the quantity demanded equals the quantity supplied.

Equilibrium → Q_d = Q_s

Equilibrium Price and Quantity

• The equilibrium price (P_e) is the price at which demand equals supply.
• The equilibrium quantity (Q_e) is the quantity bought and sold at that price.
• There is no tendency for price to change at equilibrium.

How Equilibrium is Reached

The market naturally moves toward equilibrium through the forces of excess demand and excess supply.

If price is above equilibrium:

• • Quantity supplied > Quantity demanded
  • This creates a surplus (excess supply)
  • Firms lower prices to sell excess goods
  • Price falls toward equilibrium

If price is below equilibrium:

• • Quantity demanded > Quantity supplied
  • This creates a shortage (excess demand)
  • Consumers compete, pushing prices up
  • Price rises toward equilibrium

Surplus → Price falls
Shortage → Price rises

Disequilibrium Situations

1. Excess Supply (Surplus)

• Occurs when price is above equilibrium.
• Producers supply more than consumers demand.
• Leads to unsold goods.
• Firms reduce prices.

2. Excess Demand (Shortage)

• Occurs when price is below equilibrium.
• Consumers demand more than firms supply.
• Leads to competition among buyers.
• Prices increase.

Key Ideas:

• Equilibrium is determined by interaction of demand and supply.
• Markets tend to move toward equilibrium automatically.
• Price acts as a signal and incentive.
• Disequilibrium creates forces that restore balance.

Summary Table