Define market equilibrium and explain why it is described as a position of rest.

Market equilibrium is the price at which the quantity consumers wish to buy exactly equals the quantity producers wish to sell, so the market clears with no unsold stock and no unsatisfied buyers. It is a position of rest because at that price no participant has any reason to change their behaviour: sellers can sell all they want and buyers can buy all they want. Any other price sets in motion forces that push the market back towards it.

Describe how the equilibrium price and quantity are found on a demand and supply diagram, naming the axes.

Put price per unit on the vertical axis and quantity per period on the horizontal axis. Draw the demand curve sloping downwards and the supply curve sloping upwards. The equilibrium is where the two curves intersect: reading horizontally from that point to the vertical axis gives the equilibrium price, and reading vertically down to the horizontal axis gives the equilibrium quantity.

In a market, quantity demanded is Qd = 120 − 2P and quantity supplied is Qs = −30 + 3P, with P in pounds and Q in thousands of units. Calculate the equilibrium price and quantity.

In equilibrium Qd = Qs, so 120 − 2P = −30 + 3P. Adding 2P to both sides and adding 30 gives 150 = 5P, so P = £30. Substituting into demand gives Qd = 120 − 2 × 30 = 60 thousand units, and into supply gives Qs = −30 + 3 × 30 = 60 thousand units. The two agree, confirming equilibrium at a price of £30 and a quantity of 60 thousand units.

For the market Qd = 120 − 2P and Qs = −30 + 3P, with P in pounds and Q in thousands, calculate the excess demand or supply at a price of £20.

At P = £20, quantity demanded is 120 − 2 × 20 = 80 thousand units and quantity supplied is −30 + 3 × 20 = 30 thousand units. Quantity demanded exceeds quantity supplied by 80 − 30 = 50 thousand units, so there is excess demand of 50 thousand units. The price will be bid upwards towards the equilibrium of £30.

CCEA AS-Level Economics 4410

Key Economic Concepts

Topic overview The four factors of production Positive statements and normative judgements Economic agents and what they are trying to achieve Capital goods and consumption goods Product markets and factor markets

The Basic Economic Problem of Scarcity and Choice

Topic overview Scarcity, choice and opportunity cost Drawing and reading the production possibility frontier Using a PPF to show choice, opportunity cost, efficiency and growth Why an economy operates inside its frontier Specialisation and the division of labour Free market, planned and mixed economies

Demand and Supply in Product Markets

Topic overview What determines demand and what determines supply Movements along a curve versus shifts of a curve Why the demand curve slopes downwards Why the supply curve slopes upwards: marginal cost and the profit incentive Consumer surplus and producer surplus When consumers do not behave rationally

Markets and Equilibrium

Topic overview Market equilibrium and how markets clear How shifts in demand and supply change the equilibrium Price signals, incentives, rationing and the role of profit Joint, composite and derived demand and joint supply Tracing effects between interrelated markets Community surplus and allocative efficiency Demand and supply in housing, energy and commodity markets Indirect taxes and subsidies: impact and incidence

Elasticity of Demand and Supply

Topic overview Price elasticity of demand: measuring and interpreting Income and cross elasticity: normal, inferior, substitutes and complements Price elasticity of supply What determines the value of an elasticity Elasticity and total revenue How useful is elasticity for firms and government?

Factor Markets: Labour

Topic overview How a competitive labour market sets the wage Elasticity of labour demand and labour supply Wage differentials and why they persist Economic rent and transfer earnings Flexibility: trade unions, welfare and migration Minimum wages and government intervention in the labour market

Market Failures and Imperfections

Topic overview Market equilibrium, the social optimum and the meaning of market failure Externalities: private, external and social costs and benefits Community surplus and the externality diagrams Calculating and interpreting welfare loss Public goods, quasi-public goods and the free rider problem The consequences of missing markets for public goods Merit goods and demerit goods Information gaps and asymmetric information The consequences of merit goods, demerit goods and information failure Market power and other market imperfections Income and wealth inequality Absolute and relative poverty

Government Intervention in Markets

Topic overview Why governments step into markets Indirect taxes Subsidies, and choosing between taxes and subsidies Maximum and minimum prices State provision Regulation Information provision Tradeable pollution permits Government failure

The Circular Flow of Income

Topic overview Households, firms and the two-way flow Injections and withdrawals in an open economy with government Equilibrium and change in the circular flow

Measuring National Income

Topic overview Three routes to the same total: income, expenditure and output GDP as a measure of welfare and its limitations Domestic or national? GDP and GNP compared Nominal and real values: correcting for price changes Total and per capita measures

Aggregate Demand

Topic overview The four components of aggregate demand Why the aggregate demand curve slopes downwards Movements along and shifts in aggregate demand Factors that shift aggregate demand Investment: gross, net and fixed capital

Aggregate Supply

Topic overview Why short-run aggregate supply slopes upwards Factors that shift short-run aggregate supply Movements along and shifts in aggregate supply From the short run to the long run What determines long-run aggregate supply Keynesian and neoclassical views of long-run aggregate supply

Macroeconomic Equilibrium

Topic overview How aggregate demand and aggregate supply determine equilibrium Applying AD-AS analysis to growth and unemployment Applying AD-AS analysis to inflation

Macroeconomic Objectives

Topic overview Why governments target inflation, unemployment, the external balance and growth Objectives beyond the main four: the environment and the distribution of income and wealth Picturing inequality: the Lorenz curve and the Gini coefficient Where the objectives collide: the main policy conflicts Judging the trade-offs: how sharp is a conflict?

Inflation

Topic overview Inflation, deflation and disinflation: what the words actually mean Measuring the rate: the CPI and the RPI Working with index numbers Building a price index: the basket and the significance of weights Demand-pull and cost-push inflation The costs and consequences of inflation and deflation The policy response to inflation

Unemployment

Topic overview The claimant count and the ILO measure of unemployment Calculating and interpreting unemployment statistics Unemployment and economic inactivity: a distinction that changes the numbers The types of unemployment and what distinguishes them The causes of unemployment and of economic inactivity The costs and consequences of unemployment and inactivity Policies for unemployment and intervention in the labour market

Economic Growth

Topic overview Actual and potential growth on a production possibility frontier Measuring economic growth The economic cycle and output gaps The causes of economic growth Benefits, costs and the sustainability of growth Policies to promote economic growth using AD–AS analysis

Fiscal Policy and Its Effects

Topic overview What fiscal policy is and how it works Government spending and taxation: the main categories Direct and indirect taxation Fiscal policy in the AD-AS model Evaluating the impact of fiscal policy on output, employment, prices and agents

Monetary Policy

Topic overview The nature of monetary policy and the interest rate instrument The transmission mechanism from interest rates to aggregate demand Monetary policy in the AD-AS model Evaluating the impact of monetary policy on output, employment, prices and agents

Supply-Side Policies

Topic overview The nature of supply-side policy and tax cuts Deregulation and evaluating market-based supply-side policy Competition and innovation as supply-side policy Infrastructure as supply-side policy Labour market reform Education, training and the skills of the workforce Labour productivity: determinants and significance Supply-side policies in the AD-AS model Evaluating the impact of supply-side policies

Exchange Rates and the National Economy

Topic overview What an exchange rate is and how it is measured Exchange rate changes in the AD-AS model Holding the exchange rate above or below the market clearing level Why a government might have an exchange rate policy Evaluating the impact of exchange rate changes on output, employment, prices and agents

Quantitative Skills in Economics

Topic overview Ratios, shares and proportions in economic data Percentages and percentage changes in economic data Averages, medians and quantiles Index numbers, weighting and rebasing Converting money values to real values Cost, revenue and profit Elasticity: calculating the number and reading its meaning Choosing and reading economic charts and diagrams Interpreting economic data critically

Markets and Equilibrium

8 subtopics
21 things to know
Unit AS 1

What Markets and Equilibrium covers

Markets and equilibrium is examined in Unit AS 1, Markets and Market Failure. It covers market equilibrium and how markets clear, how shifts in demand and supply change the equilibrium, price signals, incentives, rationing and the role of profit, joint, composite and derived demand and joint supply, tracing effects between interrelated markets, community surplus and allocative efficiency, demand and supply in housing, energy and commodity markets and indirect taxes and subsidies: impact and incidence.

Where it is assessed

Unit AS 1

Markets and Market Failure, written examination, 20% of A level.

Check the CCEA specification ↗

The 8 subtopics

Each one has its own page. CCEA AS Economics students sit this topic in the first year.

What you need to know

Answer each one before you reveal it.

Your recallNot started

Key term

Explain what excess demand is and how the market removes it.

Key term

Explain what excess supply is and how the market removes it.

Key term

Explain the role of stock levels in signalling to a firm that the price is wrong.

Key term

A fall in demand for a good occurs because a substitute becomes cheaper. Describe the effect on the equilibrium.

Key term

A rise in production costs reduces supply. Describe the effect on the equilibrium price and quantity.

Key term

Explain why unusually high profits in an industry tend not to persist in a competitive market.

Key term

Distinguish between price acting as a rationing device and rationing by queue.

Process

Analyse how the price mechanism reallocates resources when consumer tastes shift from one product to another.

Key term

Explain how a fall in demand for diesel affects the market for petrol, given that both come from refining crude oil.

Key term

Demand for cheese rises sharply. Explain the effect on the price of fresh milk for drinking, using composite demand.

Key term

Distinguish between composite demand and joint demand.

Key term

Distinguish between joint supply and competitive supply.

Key term

Describe how community surplus is shown on a demand and supply diagram, naming the axes.

Key term

Give two reasons why an unregulated market may fail to maximise community surplus.

Key term

Analyse how a price ceiling set below the equilibrium affects community surplus.

Key term

Explain why an unusually cold winter raises energy prices, identifying which curve shifts.

Key term

Evaluate the use of a cap on the price of domestic energy as a response to a sharp rise in wholesale prices.

Key term

Analyse how a subsidy for insulating homes affects the energy market over time.

Key term

Distinguish between the impact and the incidence of a tax.

Key term

Explain what determines whether consumers or producers bear the larger share of an indirect tax.

Key term

Explain what determines how the benefit of a subsidy is divided between consumers and producers.

Take Markets and Equilibrium further

The same content, four other ways.

Commonly confused

Pairs that lose marks when they are blurred together.

Joint demand vs Composite demand
Joint demand: two goods wanted together, so more demand for one raises demand for the other. Composite demand: one good with rival uses, so more demand from one use leaves less for the others and raises the price for all.
The burden of a tax vs The incidence of a tax
The burden of a tax: the total loss the tax imposes, including the welfare loss on units no longer traded. The incidence of a tax: how the revenue part of that loss is divided between consumers and producers.
Economic growth vs Economic development
Economic growth: an increase in real output. Economic development: a broader improvement in living standards including health, education, and the distribution of income and opportunity.

Questions from this topic

Each one with the model answer underneath.

1
Define market equilibrium and explain why it is described as a position of rest.
Model answer
Market equilibrium is the price at which the quantity consumers wish to buy exactly equals the quantity producers wish to sell, so the market clears with no unsold stock and no unsatisfied buyers. It is a position of rest because at that price no participant has any reason to change their behaviour: sellers can sell all they want and buyers can buy all they want. Any other price sets in motion forces that push the market back towards it.
2
Describe how the equilibrium price and quantity are found on a demand and supply diagram, naming the axes.
Model answer
Put price per unit on the vertical axis and quantity per period on the horizontal axis. Draw the demand curve sloping downwards and the supply curve sloping upwards. The equilibrium is where the two curves intersect: reading horizontally from that point to the vertical axis gives the equilibrium price, and reading vertically down to the horizontal axis gives the equilibrium quantity.
3
Explain what excess demand is and how the market removes it.
Model answer
Excess demand, or a shortage, exists when the price is below equilibrium so that the quantity demanded exceeds the quantity supplied. Buyers compete for the limited quantity available and are willing to pay more, while sellers find their stocks running down and raise prices. As the price rises, quantity demanded contracts along the demand curve and quantity supplied extends along the supply curve, and the gap closes until the market clears.
4
Explain what excess supply is and how the market removes it.
Model answer
Excess supply, or a surplus, exists when the price is above equilibrium so that the quantity supplied exceeds the quantity demanded. Unsold stock accumulates, so sellers cut prices to shift it and some producers reduce output. As the price falls, quantity supplied contracts along the supply curve and quantity demanded extends along the demand curve, and the gap closes until the market clears.
5
In a market, quantity demanded is Qd = 120 − 2P and quantity supplied is Qs = −30 + 3P, with P in pounds and Q in thousands of units. Calculate the equilibrium price and quantity.
Model answer
In equilibrium Qd = Qs, so 120 − 2P = −30 + 3P. Adding 2P to both sides and adding 30 gives 150 = 5P, so P = £30. Substituting into demand gives Qd = 120 − 2 × 30 = 60 thousand units, and into supply gives Qs = −30 + 3 × 30 = 60 thousand units. The two agree, confirming equilibrium at a price of £30 and a quantity of 60 thousand units.
6
For the market Qd = 120 − 2P and Qs = −30 + 3P, with P in pounds and Q in thousands, calculate the excess demand or supply at a price of £20.
Model answer
At P = £20, quantity demanded is 120 − 2 × 20 = 80 thousand units and quantity supplied is −30 + 3 × 20 = 30 thousand units. Quantity demanded exceeds quantity supplied by 80 − 30 = 50 thousand units, so there is excess demand of 50 thousand units. The price will be bid upwards towards the equilibrium of £30.

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Key Economic Concepts

The Basic Economic Problem of Scarcity and Choice

Demand and Supply in Product Markets

Markets and Equilibrium

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Markets and Equilibrium revision questions

Is Markets and Equilibrium examined at AS in CCEA Economics?: Yes. It sits in Unit AS 1, which you take in the first year, so it is on the AS paper as well as counting towards the full A level.
What does Markets and Equilibrium cover in CCEA AS-Level Economics?: 8 subtopics: market equilibrium and how markets clear, how shifts in demand and supply change the equilibrium, price signals, incentives, rationing and the role of profit, joint, composite and derived demand and joint supply, tracing effects between interrelated markets, community surplus and allocative efficiency, demand and supply in housing, energy and commodity markets and indirect taxes and subsidies: impact and incidence. Each one has its own page with questions and model answers.
How is Markets and Equilibrium organised?: By the CCEA 4410 specification, subtopic by subtopic, so it matches the order you are taught it in.

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