Cambridge IGCSE Economics 0455
Syllabus points
- Explain market equilibrium and how it is reached.
- Explain the meaning of excess demand and excess supply.
Market equilibrium
Equilibrium is the price at which the quantity demanded equals the quantity supplied. On a diagram it is where the demand and supply curves cross. At this equilibrium (market-clearing) price there is no shortage or surplus, so the price stays stable.
Key definitions
| Term | Definition |
|---|---|
| Equilibrium price | The price where quantity demanded equals quantity supplied. |
| Excess demand (shortage) | Quantity demanded exceeds quantity supplied at a given price. |
| Excess supply (surplus) | Quantity supplied exceeds quantity demanded at a given price. |
How the market clears
- If the price is above equilibrium, there is excess supply (a surplus). Firms cannot sell all their stock, so they lower the price until the market clears.
- If the price is below equilibrium, there is excess demand (a shortage). Buyers compete for the good, pushing the price up until the market clears.
Surplus → price falls; shortage → price rises; the market moves back to equilibrium.
Worked example
A concert sells tickets below the market-clearing price. At that low price, far more people want tickets than are available — excess demand. Tickets sell out instantly and a resale (secondary) market appears at higher prices. If the seller had set the equilibrium price, quantity demanded would equal quantity supplied and no shortage would occur.
Common exam mistakes
- Confusing excess demand (below equilibrium) with excess supply (above equilibrium).
- Forgetting to show how price *adjusts* back to equilibrium.
- Not labelling equilibrium price and quantity on the diagram.
Exam technique
Draw and label demand and supply, mark the equilibrium price and quantity, and explain the adjustment: identify the surplus or shortage and how price moves to remove it.
Quick revision
- Equilibrium = where D meets S.
- Above equilibrium → surplus → price falls.
- Below equilibrium → shortage → price rises.