Market equilibrium, excess demand and excess supply

Equilibrium

Equilibrium is where quantity demanded equals quantity supplied. At the equilibrium price there is no pressure for the price to change.

Diagram in words: draw D sloping down and S sloping up. Where they cross, draw dotted lines to the axes: the equilibrium price P1 on the vertical axis and the equilibrium quantity Q1 on the horizontal axis.

Algebra: with Qd = a - bP and Qs = c + dP, set Qd = Qs and solve for P.

Excess demand and excess supply

• If price is lower than equilibrium, quantity demanded is greater than quantity supplied: excess demand (a shortage). Buyers compete for scarce goods, so the price is bid up. As it rises, demand contracts and supply extends until equilibrium is restored.
• If price is higher than equilibrium, quantity supplied is greater than quantity demanded: excess supply (a surplus). Unsold stock builds up, so firms cut prices. Demand extends and supply contracts until equilibrium is restored.

On the diagram, excess demand or supply is the horizontal distance between the curves at that price.

Shifts and the new equilibrium

Four basic cases (other things equal):

• Demand increases (D shifts right): price rises, quantity rises.
• Demand decreases (D left): price falls, quantity falls.
• Supply increases (S right): price falls, quantity rises.
• Supply decreases (S left): price rises, quantity falls.

If both curves shift, the effect on one variable is certain and the other depends on the size of the shifts. For example, if demand and supply both increase, quantity definitely rises but price may rise, fall or stay the same.

The size of the price change depends on elasticity: a demand increase raises price a lot if supply is inelastic and raises quantity a lot if supply is elastic.

Exam technique: explaining a change

Use a chain of reasoning: cause, which curve shifts and which way, the excess demand or supply created at the old price, how price adjusts, the new equilibrium (P2, Q2). Always draw and refer to the diagram; Pearson's longer questions are capped if a required diagram is missing.

Worked example

Demand is Qd = 120 - 4P and supply is Qs = -20 + 3P. Find the equilibrium price and quantity, and the excess demand at a price of $15.

1. Set 120 - 4P = -20 + 3P, so 140 = 7P and P = 20.
2. Q = 120 - 4 x 20 = 40.
3. At $15: Qd = 60, Qs = 25. Excess demand = 60 - 25 = 35.

Answer: Equilibrium P = $20, Q = 40; excess demand of 35 units at $15.

Check yourself

1. Demand is Qd = 200 - 10P and supply is Qs = 20 + 5P. Calculate the equilibrium price.
   Show answer

   $12. 200 - 10P = 20 + 5P, so 180 = 15P and P = 12.

2. Using Qd = 200 - 10P and Qs = 20 + 5P, calculate the equilibrium quantity.
   Show answer

   80 units. Substitute P = 12: Q = 200 - 10 x 12 = 80.

3. Using Qd = 120 - 4P and Qs = -20 + 3P, calculate the excess supply at a price of $25.
   Show answer

   35 units. Qs = 55, Qd = 20; excess supply = 35.

4. The price of a good is set lower than its equilibrium. In a free market, what happens next?
   • Excess supply causes the price to fall
   • Supply shifts to the right
   • Excess demand causes the price to be bid up
   • Demand shifts to the left
   Show answer

   Excess demand causes the price to be bid up. Buyers compete for the limited quantity, pushing price up towards equilibrium.

5. Demand for a good increases and, at the same time, its supply increases. Which outcome is certain?
   • Equilibrium quantity rises
   • Equilibrium price rises
   • Equilibrium price falls
   • Equilibrium quantity falls
   Show answer

   Equilibrium quantity rises. Each shift raises quantity; their effects on price work in opposite directions.

6. Demand increases. The equilibrium price will rise most when supply is
   • price elastic
   • perfectly elastic
   • price inelastic
   • unitary elastic
   Show answer

   price inelastic. Producers cannot raise output much, so price absorbs most of the change.

7. Explain how the market removes excess supply.
   Show answer

   At a price higher than equilibrium, unsold stock builds up, so firms cut their prices. As the price falls, quantity demanded extends and quantity supplied contracts until they are equal at the equilibrium price.. Price falls, then describe the movements along both curves.

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Sources

• Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics specification (2018)

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