Market clearing and simultaneous changes
| English | 中文 | Pinyin |
|---|---|---|
| excess supply/ekˈses səˈplaɪ/ | 超额供给 | chāo é gōng jǐ |
| market equilibrium/ˈmɑːkɪt ˌiːkwɪˈlɪbrɪəm/ | 市场均衡 | shì chǎng jūn héng |
A decision you can investigate
- A canteen offers meal vouchers. A price set too low creates queues; too high leaves vouchers unsold.
- Equilibrium compares planned buying with planned selling, not total wishes.
Build the explanation
- Equilibrium occurs where quantity demanded equals quantity supplied. Excess demand can encourage price increases; excess supply 超额供给 can encourage price reductions when prices adjust. A demand shift normally changes equilibrium through movement along unchanged supply, and vice versa.
- If both demand and supply rise, quantity normally rises but price depends on their relative shifts. If demand rises while supply falls, price normally rises but quantity is ambiguous. Do not invent a definite result for an unspecified magnitude.
Work through the evidence
- Fictional demand is Qd=120−2P and supply Qs=2P. Set 120−2P=2P: P=30 and Q=60. At P=20, Qd=80 and Qs=40: shortage=40. At P=40, Qd=40 and Qs=80: surplus=40.
- If demand becomes Qd=160−2P with supply unchanged, equilibrium is P=40 and Q=80. If supply also becomes Qs=20+2P, solving gives P=35 and Q=90. Price rises in this specified case, but a larger supply shift could instead lower it.
What is the original equilibrium price?
120−2P=2P gives 4P=120.
Test the limits
- Adjustment requires prices and production choices to respond. Binding controls, contracts, short production periods or imperfect information can delay clearing. The equations are an illustrative market, not an estimate of canteen behaviour.
- A curve shift is not a move between two points on that curve. Always name which determinant changes and hold the other relevant influences fixed before interpreting a diagram.
What is the shortage at price 20?
Subtract supply 40 from demand 80.
Higher demand automatically means that the supply curve shifts right.
It can instead move equilibrium along an unchanged supply curve.
Apply and explain your answer
- Why is the price direction ambiguous when both demand and supply increase without specified magnitudes?
- Demand tends to raise price and supply tends to lower it; the relative shifts determine the net effect.
If demand rises and supply falls, what is normally unambiguous?
Both changes raise price but have opposing quantity effects.
Use the terms precisely
- market equilibrium 市场均衡: Planned quantity demanded equals planned quantity supplied at a price.
- excess supply: Planned supply exceeds planned demand at a particular price.
Match the terms to their meanings.
Use each term for its stated economic relationship.
Fictional demand is Qd=120−2P and supply Qs=2P. Set 120−2P=2P: P=30 and Q=60. At P=20, Qd=80 and Qs=40: shortage=40. At P=40, Qd=40 and Qs=80: surplus=40. If demand becomes Qd=160−2P with supply unchanged, equilibrium is P=40 and Q=80. If supply also becomes Qs=20+2P, solving gives P=35 and Q=90. Price rises in this specified case, but a larger supply shift could instead lower it.
Adjustment requires prices and production choices to respond. Binding controls, contracts, short production periods or imperfect information can delay clearing. The equations are an illustrative market, not an estimate of canteen behaviour. A curve shift is not a move between two points on that curve. Always name which determinant changes and hold the other relevant influences fixed before interpreting a diagram.
Equilibrium occurs where quantity demanded equals quantity supplied. Excess demand can encourage price increases; excess supply can encourage price reductions when prices adjust. A demand shift normally changes equilibrium through movement along unchanged supply, and vice versa.