Supply & Demand Market Equilibrium - AP/IB/College

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AP, IB, and College Microeconomic and Macroeconomic Principles 

Youtube Facebook-f Twitter Search How is equilibrium price determined?

Updated 3/22/2024 Jacob ReedBelow is a review of how markets reach equilibrium. If you would like to get some practice with these concepts, head over to the Shifting Markets Review Game.

Market at Equilibrium

What is equilibrium?

Equilibrium is the price that clears the market. In other words it is the price where quantity supplied equals quantity demanded. Market forces push prices toward equilibrium. 

Price above equilibrium
Price Above Equilibrium

How does the market move toward equilibrium?

If the market price is above equilibrium, quantity supplied will be greater than quantity demanded, creating a surplus. When that occurs, suppliers have produced more than they are able to sell at the current price. The surplus induces suppliers to lower their price, (increasing Qd and decreasing Qs) until equilibrium is reached and the surplus is eliminated. 

If the market price is below equilibrium, quantity supplied will be less than quantity demanded, creating a shortage. When that occurs, suppliers will sell out of the product and some customers will be left wanting. This induces sellers to raise their price toward equilibrium (decreasing Qd and increasing Qs) until equilibrium is reached and the shortage is eliminated. 

Price Below Equilibrium
Price Below Equilibrium

How do shifts in supply and demand change equilibrium?

Shifts in supply or demand curves move the equilibrium price and quantity. If demand increases, equilibrium price and quantity both increase. If demand decreases, equilibrium price and quantity both decrease. If supply increases, equilibrium price decreases, and quantity increases. If supply decreases, equilibrium price increases and equilibrium quantity decreases. Note: If you don’t recall what shifts supply and demand, go review your demand and supply shifters.

Demand Increase
Demand Increase
Demand Decrease
Demand Decrease
Supply Increase
Supply Increase
Supply Decrease
Supply Decrease

How do double shifts impact price and quantity?

When supply and demand both shift, either price or quantity will be indeterminate. When supply and demand move in the same direction, price is indeterminate. That is because an increase in supply decrease price while an increase in demand will increase price. Since the price axis moves in both directions, the net effect is based on which shift is stronger. Since that cannot be known, the price will be indeterminate. Since both shifts increase equilibrium quantity, the quantity will definitely increase. 

Similarly, when supply and demand move in opposite directions, quantity is indeterminate because one shift will increase quantity and the other will decrease quantity. 

The key to figuring out the impact of double shifts is to graph out both shifts and see what happens to the equilibrium price and quantity with each shift. If the shifts conflict, that axis is indeterminate. 

Supply and Demand Increase Double Shift
Demand & Supply Increase
Supply Increase, Demand Decrease Double Shift
Demand Decrease & Supply Increase

Multiple Choice Connections:2012 Released AP Microeconomics Exam Questions: 3, 32, 35

Up Next:Review Game: Shifting Markets and Prices, Points, and QuantitiesGraph Drawing Practice: Perfectly Competitive MarketContent Review Page: Economic Surplus and Deadweight Loss

Other recommended resources: ACDC Video, Economics Fun Video

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I would like to acknowledge the work of Dick Brunelle and Steven Reff from Reffonomics.com whose work inspired many of the review games on this site. I would also like to thank Francis McMann, James Chasey, and Steven Reff who taught me how to be an effective AP Economics teacher at AP summer institutes; as well as the countless high school teachers, and college professors from the AP readings, economics Facebook groups, and #econtwitter.

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