SL MICROECONOMICS Summary - Competitive Market Equilibrium, Price Mechanism and Law of Supply
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Course
HL Economics
Institution
Loughborough University (LU)
Summary of the SL portion of part of the microeconomics unit of the SL IB economics course (the new 2020 onwards syllabus). This document covers Competitive Market Equilibrium, the Price Mechanism and Law of Supply.
Market Equilibrium = occurs when quantity demanded and quantity supplied are equal
- Qs = Qd
- This price = market clearing price >> everything will be sold out
- There is no tendency for the price to change
- Ideal situation for a free market
Market Disequilibrium = there is excess demand (shortage) or excess
supply (surplus), and the forces of supply and demand cause the price to change until the market
reaches equilibrium - in a free market
- Excess Supply = Surplus
- Qs > Qd
- At the initial price producers are willing and able to produce x
units of product z but consumers are only willing and able to
buy y units of the product >>> leaves an excess of x – y units
- Producers will then lower their prices to encourage consumers to
purchase the excess units
- As the price falls, Qs falls & Qd rises
- As long as there is a surplus there will be downward pressure on
the price >> will keep decreasing until Qs = Qd and surplus is
eliminated
- Excess Demand = Shortage
- Qs < Qd
- There is now an excess demand and a shortage of the product z
- As the price continues to decrease, producers are now only
willing and able to produce x - y units but consumers are now
willing and able to buy x units
- Producers will recognise the shortage in z and start to raise the
price >> Qd begins to fall and Qs rises
- The shortage exerts an upward pressure on price
>> will keep increasing until Qs = Qd and shortage is eliminated
E.g. market for chocolate bars
, Demand Curve Shifts:
- Some change in determinant causes the - Some change in determinant causes leftward
demand curve to shift right (increase) from shift (decrease) in demand curve from D1 to D2
D1 to D2 - Given D3, at P1 there is movement from point a
- Given D2, at P1 there is movement from to b >> resulting in excess supply = a – b
point a to b >> resulting in excess demand - b = disequilibrium where Qs > Qd, exerting
=b–a downward pressure on price
- b = disequilibrium where Qd > Qs, >> causes movement along D3 to point c,
exerting upward pressure on price excess supply is eliminated
>> causes movement along D2 to point c, - Lower equilibrium price & lower equilibrium
excess demand is eliminated quantity
- Higher equilibrium price & higher
equilibrium quantity
Supply Curve Shifts:
- A determinant causes a leftward shift
- A determinant causes a rightward shift
(decrease) in the supply curve to S3
(increase) in the supply curve to S2
- At S3, at P1, there is a move from a to b >>
- At S2, at P1, there is a move from a to b >>
excess demand = a – b
excess demand = b – a
- b = disequilibrium due to Qd > Qs
- b = disequilibrium due to Qs > Qd
- Price begins to rise >> results in poitive
- Price begins to fall >> results in negative
movement along S3 to point c, excess demand
movement along S2 to point c, excess
is eliminated
supply is eliminated
- Higher equilibrium price & lower equilibrium
- Lower equilibrium price & lower
quantity
equilibrium quantity
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