How the interaction of demand and supply determines equilibrium prices in a market economy
In a competitive market, buyers and sellers constantly push price toward one level. At that level, the amount buyers want to buy exactly equals the amount sellers want to sell.
Formula
Equilibrium: Qd = Qs
Real World
In the UK used-car market during 2021, a shortage of new cars due to the chip crisis pushed equilibrium prices for second-hand vehicles sharply upward as demand outstripped supply.
Exam Focus
When drawing equilibrium, explicitly mark Pe and Qe on the axes — unlabelled intersections rarely receive full diagram marks.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
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