Price determination — Edexcel A-Level Economics A
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Price determination explained
Equilibrium price and quantity occur where the demand and supply curves intersect.
Read the full explanation
At this price, the quantity consumers wish to buy equals the quantity producers wish to sell, leaving no shortage or surplus and no tendency for price to change. If price is above equilibrium, quantity supplied exceeds quantity demanded, creating a surplus that pushes price down. If price is below equilibrium, quantity demanded exceeds quantity supplied, creating a shortage that pushes price up. These movements reflect the rationing and signalling functions of price. For example, if a new coffee shop opens, market supply increases, the supply curve shifts right, price falls and quantity traded increases until a new equilibrium is reached. Equilibrium is determined by these market interactions.
Your focus
- Define equilibrium price and quantity and explain how they are determined by demand and supply.
- Explain how shortages and surpluses cause price to move towards equilibrium.
- Analyse how shifts in demand or supply change equilibrium price and quantity in a given market.
Price determination exam tips
Marking Points
- Defines equilibrium price as the price at which quantity demanded equals quantity supplied.
- Defines equilibrium quantity as the quantity bought and sold at the equilibrium price.
- Explains that equilibrium is determined by the intersection of the demand and supply curves.
- Describes how a surplus above equilibrium causes price to fall and how a shortage below equilibrium causes price to rise.
- Explains how a shift in demand or supply changes the equilibrium price and quantity.
- Applies the model to a concrete market example, such as coffee, to show the adjustment process.
Examiner Tips
- 💡In multiple-choice questions, identify whether the scenario shifts demand, shifts supply or moves along a curve; this determines the effect on equilibrium price and quantity.
- 💡Use a diagram to check the direction of change: a rightward shift in demand raises both equilibrium price and quantity, while a rightward shift in supply lowers price and raises quantity.
- 💡Remember that a surplus or shortage is a temporary disequilibrium that creates pressure for price to change towards equilibrium.
- 💡Read the question carefully to see whether it asks for the effect on price, on quantity or on both.
Common Mistakes
- Confusing a movement along a curve with a shift of a curve; correct this by stating that a change in price causes a movement along the demand or supply curve, while a change in a non-price determinant shifts the curve.
- Thinking that equilibrium means quantity demanded equals quantity supplied at every price; correct this by stressing that equilibrium is the single price where the two are equal.
- Assuming that a surplus causes price to rise; correct this by explaining that excess supply pushes price down, while excess demand pushes price up.
- Believing that equilibrium price is fixed by the government or by firms; correct this by explaining that in a free market it emerges from the interaction of demand and supply.