Markets: demand, supply and equilibrium diagrams

Equilibrium

Equilibrium is where demand equals supply: the market clears, with no shortage or surplus. The price is the equilibrium price (Pe) and the quantity is the equilibrium quantity (Qe).

• If price is above equilibrium there is excess supply (a surplus): unsold stock builds up, so firms cut prices until the surplus disappears.
• If price is below equilibrium there is excess demand (a shortage): queues form and goods sell out, so prices rise until the shortage disappears.

Price acts as a signal: it rations scarce goods and tells producers where to move resources.

Four changes to know

Effects on equilibrium of a single shift

Constructing a diagram for 4 marks

Pearson's mark schemes for 'construct a supply and demand diagram' (January 2022, June 2024) split the 4 marks as K1, A2, An1:

1. K1: correctly labelled axes, 'Price' (vertical) and 'Quantity' (horizontal).

2. A1: original demand and supply curves with the original equilibrium price and quantity marked (P1, Q1).

3. A1: the correct curve shifted in the correct direction (for example D1 to D2 to the right after increased publicity).

4. An1: the new equilibrium price and quantity shown (P2, Q2), moving in the correct directions.

Example (June 2024): a rise in rice prices increases demand for pasta, a substitute: D shifts right, price and quantity of pasta rise.

Interpreting diagrams

When the question asks for consequences, explain the chain: what caused the shift, which curve shifts, what happens at the old price (shortage or surplus), and how price adjusts to the new equilibrium. Then link to the business: higher price and quantity mean higher revenue for sellers; a rise in costs (supply left) may squeeze profit if the price rise is small.

Worked example

Publicity about plastic pollution increases demand for biodegradable packaging. Describe the diagram you would construct.

1. Axes labelled Price (vertical) and Quantity (horizontal).
2. Draw D1 and S; mark P1 and Q1 where they cross.
3. Draw D2 to the right of D1.
4. Mark the new equilibrium P2 and Q2, both higher than P1 and Q1.

Answer: Demand shifts right, so equilibrium price and quantity both rise (this was the January 2022 WBS11 construct question).

Check yourself

1. The price of a product is set above the equilibrium price. What results?
   • Excess supply, so price tends to fall
   • Excess demand, so price tends to rise
   • Equilibrium, so nothing changes
   • A shift of the demand curve to the right
   Show answer

   Excess supply, so price tends to fall. Quantity supplied exceeds quantity demanded at the higher price.

2. Demand increases while supply is unchanged. What happens to equilibrium price and quantity?
   • Price falls, quantity rises
   • Price rises, quantity falls
   • Price rises, quantity rises
   • Price falls, quantity falls
   Show answer

   Price rises, quantity rises. D shifts right along an unchanged S.

3. Bad weather destroys part of the orange harvest. What happens in the orange market?
   • Price rises and quantity falls
   • Price falls and quantity rises
   • Price and quantity rise
   • Price and quantity fall
   Show answer

   Price rises and quantity falls. Supply shifts left.

4. In Pearson's 4-mark construct question, which earns the knowledge (K1) mark?
   • The new equilibrium price and quantity
   • Shifting the correct curve
   • A written conclusion
   • Correctly labelled axes: price and quantity
   Show answer

   Correctly labelled axes: price and quantity. K1 is for the labelled axes.

5. Rice prices rise. Pasta is a substitute for rice. What happens in the pasta market?
   • Supply of pasta shifts left; price rises and quantity falls
   • Demand for pasta shifts right; price and quantity of pasta rise
   • Demand for pasta shifts left; price and quantity fall
   • Supply of pasta shifts right; price falls
   Show answer

   Demand for pasta shifts right; price and quantity of pasta rise. This was the June 2024 WBS11 construct question.

6. Explain how a shortage in a market is removed.
   Show answer

   Excess demand means some customers cannot buy the product, so sellers raise the price; quantity demanded falls and quantity supplied rises until they are equal at the equilibrium.. Price rises until demand equals supply.

7. New technology cuts production costs in the solar panel market. Describe the effect on the equilibrium price and quantity.
   Show answer

   Supply shifts to the right, so the equilibrium price falls and the equilibrium quantity rises.. Supply right: price down, quantity up.

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Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Business specification (2018)
• Pearson WBS11/01 mark scheme, January 2022
• Pearson WBS11/01 mark scheme, June 2024

Last updated 8 November 2026. Spotted a mistake? Tell us.