2.5 Price Determination

2026 📋 Syllabus Objectives

By the end of these notes, you should be able to:

  • 2.5.1 Market Equilibrium: Define market equilibrium, draw and read demand and supply schedules and curves, and use them to identify the equilibrium price and quantity in a market.
  • 2.5.2 Market Disequilibrium: Define market disequilibrium, draw and read demand and supply schedules and curves, and use them to identify disequilibrium prices, shortages (demand exceeding supply), and surpluses (supply exceeding demand).

📖 Main Content

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2.5.1 Market Equilibrium

What is a Market?

A market is any place — physical or online — where buyers and sellers come together to trade goods and services. In a market, the price of a product is decided by the forces of demand and supply.

  • Demand tells us how much of a product buyers want to buy at different prices.
  • Supply tells us how much of a product sellers are willing to sell at different prices.

How Are Prices Determined?

Prices are not just chosen randomly by sellers. They are determined through a process of buyers and sellers interacting with each other.

  • Sometimes this happens through direct bargaining — for example, haggling at a market stall.
  • More often, it is indirect: sellers estimate what price will attract enough buyers to sell all their stock, then adjust based on whether they sell too much or too little.

The key rule sellers follow is:

💡 If they cannot sell all their products → lower the price. 💡 If buyers want more than what is available → raise the price.

This process continues until the market reaches a point where everyone is happy — this is called equilibrium.

What is Market Equilibrium?

Market equilibrium is the situation where the quantity demanded (the amount buyers want to buy) equals the quantity supplied (the amount sellers want to sell) at a particular price.

  • At this point, there is no shortage and no surplus — the market is perfectly balanced.
  • This price is also called the market clearing price because all the goods being offered for sale are sold ("cleared").

🧠 Think of it like this: Imagine a school canteen sells 100 sandwiches at £2 each, and exactly 100 students want to buy one. Everyone is happy — buyers get their sandwich and the seller sells all stock. That is equilibrium!

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