Pearson Edexcel · A-Level · Economics B
Course version: 9EB0 · Version from Sept 2015
C) The operation of market forces to eliminate excess demand and excess…
Full specification wording
Price determination: c) The operation of market forces to eliminate excess demand and excess supply
Market forces naturally act to eliminate excess demand and excess supply by adjusting prices towards equilibrium.
Checked against the Pearson Edexcel 9EB0 specification (opens in a new tab) on .
- Point 3 of 5
- 4 key terms
Study notes
From the checked teaching notes for this specification point.
The idea
Market forces naturally act to eliminate excess demand and excess supply by adjusting prices towards equilibrium. When excess supply exists, producers hold unsold stock. To clear this inventory, they lower prices, which contracts the quantity supplied and extends the quantity demanded until equilibrium is reached. Conversely, when excess demand occurs, consumers compete for limited goods, bidding up the price. This price increase provides an incentive for producers to extend the quantity supplied while simultaneously contracting the quantity demanded.
For example: If a popular toy experiences excess demand, retailers will raise the price, reducing the number of willing buyers and encouraging more production until the shortage is eliminated.
What earns the marks
- Explain that excess supply creates downward pressure on prices as producers try to sell unsold stock.
- Describe how a falling price leads to a contraction in supply and an extension in demand until equilibrium is restored.
- Explain that excess demand creates upward pressure on prices as consumers bid for scarce goods.
- Describe how a rising price leads to an extension in supply and a contraction in demand until the market clears.
Common mistakes and how to put them right
Stating that excess demand causes the demand curve to shift.
Put it right: Excess demand causes a movement along the demand curve as the price changes, not a shift of the curve itself.
Claiming that the government must intervene to clear excess supply.
Put it right: In a free market, the invisible hand of market forces (price changes) automatically eliminates the surplus without intervention.
Confusing the terms extension and contraction.
Put it right: An increase in price causes an extension in supply and a contraction in demand, whereas a decrease in price causes a contraction in supply and an extension in demand.
Exam tips
- Use the specific terms 'extension' and 'contraction' when describing movements along the curves in response to price changes.
- Clearly articulate the step-by-step process: identify the disequilibrium, state the direction of price change, and describe the resulting movements along both curves.
- Remember that the ultimate goal of market forces is to reach a market-clearing price where quantity supplied equals quantity demanded.
Try the lesson
The start of the Price determination: c) The operation of market forces to eliminate excess demand and excess supply lesson, made from checked teaching notes for this specification point.
Have a go first
If a market is currently experiencing excess supply, how will market forces operate to eliminate this disequilibrium?
Listen
Market forces naturally act to eliminate excess demand and excess supply by adjusting prices towards equilibrium. When excess supply exists, producers hold unsold stock. To clear this inventory, they lower prices, which contracts the quantity supplied and extends the quantity demanded until equilibrium is reached. Conversely, when excess demand occurs, consumers compete for limited goods, bidding up the price. This price increase provides an incentive for producers to extend the quantity supplied while simultaneously contracting the quantity demanded. For example, if a popular toy experiences excess demand, retailers will raise the price, reducing the number of willing buyers and encouraging more production until the shortage is eliminated. A strong answer earns marks for these points. Explain that excess supply creates downward pressure on prices as producers try to sell unsold stock. Describe how a falling price leads to a contraction in supply and an extension in demand until equilibrium is restored. Explain that excess demand creates upward pressure on prices as consumers bid for scarce goods. Describe how a rising price leads to an extension in supply and a contraction in demand until the market clears. A common slip: Stating that excess demand causes the demand curve to shift. Instead, excess demand causes a movement along the demand curve as the price changes, not a shift of the curve itself. Exam tip: Use the specific terms 'extension' and 'contraction' when describing movements along the curves in response to price changes.
See it
Key words
Say what each word means before you turn the card.
The price mechanism
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Market clearing
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Incentives and rationing
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Invisible hand
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See every definition
- The price mechanism
- The role of market forces in restoring market equilibrium without external intervention, as prices adjust to eliminate excess demand and excess supply.
- Market clearing
- Reaching a market-clearing price where quantity supplied equals quantity demanded, so the market clears.
- Incentives and rationing
- A rising price provides an incentive for producers to extend the quantity supplied while simultaneously contracting the quantity demanded.
- Invisible hand
- The market forces of price changes that automatically eliminate a surplus without intervention in a free market.
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