Short on time? This page is the recap. For explanations, graphs and worked examples, use the full study guide.
Recap
- Shortage (excess demand): Qd > Qs, at a price below equilibrium. Buyers bid the price up.
- Surplus (excess supply): Qs > Qd, at a price above equilibrium. Sellers cut the price.
- During adjustment, no curve shifts: price changes and both quantities move along their curves until Qd = Qs.
- At a disequilibrium price, the quantity traded is the smaller of Qd and Qs, and total surplus is lower than at equilibrium.
- A change in a determinant shifts a curve, creates a shortage or surplus at the old price, and the market moves to a new equilibrium.
Key relationships
| Event | Price | Quantity |
|---|---|---|
| Demand increases | rises | rises |
| Demand decreases | falls | falls |
| Supply increases | falls | rises |
| Supply decreases | rises | falls |
| D up and S up | ? | rises |
| D down and S down | ? | falls |
| D up and S down | rises | ? |
| D down and S up | falls | ? |
| Calculation | How |
|---|---|
| Shortage | Qd − Qs at the given price |
| Surplus | Qs − Qd at the given price |
| New equilibrium (straight lines) | set the new Qd = Qs, solve for P, then substitute for Q |
| CS or PS (straight lines) | ½ × Q × height of the triangle; add a rectangle at a disequilibrium price |
| Change in surplus | new area − old area, using the curves that apply after the change |
Elasticity: the more elastic the curve that does not shift, the more the effect shows up in quantity and the less in price.
Assumptions
- A competitive market with many buyers and sellers, and a price free to move.
- “Other things equal”: only the stated determinant changes.
Mistakes to avoid
- Saying a higher price “increases supply” (it increases quantity supplied).
- Measuring a shortage or surplus in dollars instead of units.
- Predicting both price and quantity when both curves shift.
- Shifting a curve back because of the price change it caused.
- Using quantity demanded as the amount traded when there is a shortage.
- Assuming consumer surplus must fall whenever price rises.
Quick self-check
- Demand is Qd = 90 − 3P and supply is Qs = 6P − 36. Find the equilibrium. (9P = 126, so P = $14 and Q = 48.)
- In the same market, what happens at $10? (Qd = 60, Qs = 24: a shortage of 36 units. The price rises.)
- Incomes rise (normal good) and a new machine cuts production costs. What can you predict? (Quantity rises; the price change is indeterminate.)
Next: practice questions.