Price Determination and Market Equilibrium

This lesson brings together demand and supply to explain how prices are determined in competitive markets. You will learn about market equilibrium, excess demand and excess supply, how equilibrium changes when demand or supply shifts, and the role of the price mechanism. This is a core topic for AQA A-Level Economics and appears in virtually every market analysis question.

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Market Equilibrium

Key Definition: Market equilibrium occurs where the quantity demanded equals the quantity supplied at a particular price. This price is called the equilibrium price (or market-clearing price), and the corresponding quantity is the equilibrium quantity.

At equilibrium, there is no tendency for the price to change — the market "clears" because every unit produced is purchased, and every consumer willing to pay the market price can find a seller.

The Equilibrium on a Diagram

The equilibrium is found at the intersection of the demand and supply curves:

• The equilibrium price (Pe) is read off the vertical axis at the point of intersection.
• The equilibrium quantity (Qe) is read off the horizontal axis at the point of intersection.