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Market Equilibrium
From ZuluNotes - Free Leaving Cert Notes
Market Equilibrium occurs at the price where Demand and Supply are equal. In a free market (where price fluctuation is allowed), the price will always bring the market to equilibrium, i.e. the point where demand and supply are equal.
Excess Supply
If price is above the equilibrium price, suppliers will want to sell more, but people will demand less, and therefore the quantity supplied will be greater than quantity demanded. This is represented by the area B in the graph on the right. Excess supply would be the triangle formed by any price line above Po. From the definition of an economic good we learned that a good will only command a price if it is scarce in relation to demand, so if there is excess supply the price cannot be maintained, and it will fall until a point is reached where demand and supply are equal.
In short, if Supply > Demand; price will fall
Excess Demand
If price is below the equilibrium, Demand will be greater than Supply and there will be a shortage of goods. Price will rise to lower demand and encourage an increase in supply. It will continue to rise until Demand = Supply.
In short: If Demand > Supply; then Price rises.
