Equilibrium Price and Intermarket Relationships
The price where demand and supply meet, how excess demand and excess supply push the price back to equilibrium, and how linked markets for substitute and complementary goods affect each other.
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Where price settles
In a market, the price does not stay just anywhere. It settles at the equilibrium price, the price where the quantity that buyers want to buy equals the quantity that sellers want to sell. At that price the market clears, meaning there are no goods left over and no buyers left waiting.
Words for pricing
Learn these four terms before you study how the price settles.
Too low or too high
When the price is not at equilibrium, pressure builds to move it back.
Trace the whole chain
Top answers trace the whole chain. For excess supply, say that unsold goods pile up, so firms cut the price, so more buyers return, until demand equals supply again. Never just name the term without the steps that follow it.
Match the term
- equilibrium price
- excess demand
- excess supply
- substitute good
- the price where demand equals supply
- when demand is greater than supply
- when supply is greater than demand
- a good that can be bought instead of another
Match the change to its effect
- a price set above the equilibrium
- a price set below the equilibrium
- the price of coffee rises
- the price of cars rises
- excess supply builds up, so the price falls
- excess demand builds up, so the price rises
- demand for tea, a substitute, rises
- demand for petrol, a complement, falls
What is equilibrium price?
What is the equilibrium price?
- The price where the quantity demanded equals the quantity supplied.
- The highest price a firm can charge.
- The lowest price in the market.
- The price that just covers the cost of production.
Spot the substitutes
Select the TWO pairs of substitute goods.
- Tea and coffee.
- Butter and margarine.
- Cars and petrol.
- Printers and ink.
Order the adjustment
A price starts too high. Put the steps that return it to equilibrium in order, earliest first.
- The price starts above the equilibrium
- This creates excess supply, as goods go unsold
- Firms cut the price to sell the goods
- Demand rises until the market clears at equilibrium
Summarise how price settles
The _____ price is the price where demand equals supply, so the market clears. If the price is too low there is _____, and the price is pushed up. If the price is too high there is _____, and the price is pushed down. Goods bought instead of each other are _____ goods, while goods used together are _____ goods.
Count at equilibrium
A market is in equilibrium and 40 units are demanded. Because demand equals supply at equilibrium, how many units are supplied?
Find the complements
Tap the TWO pairs of complementary goods.
- Cars and petrol
- Tea and coffee
- Printers and ink
- Butter and margarine
- Beef and lamb
Substitute or complement?
Decide how each pair of goods is linked.
- Strawberries and cream, which are often eaten together
- Butter and margarine, where either can be used on bread
- A games console and the games that are played on it
Explain a price change
The demand for electric cars rises. Explain how the price of electric cars reaches a new equilibrium. Use the ideas of excess demand and price changes in your answer.
- Explain what happens to demand and to the price at first
- Explain how excess demand changes the price
- Explain how the market reaches a new equilibrium