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Equilibrium Price and Quantity Equilibrium means a state of equality between demand and supply. Without a shift in demand and/or supply there will be no change in market price. In the diagram above, the quantity demanded and supplied at price P1 are equal. At any price above P1, supply exceeds demand and at a price below P1, demand exceeds supply. In other words, prices where demand and supply are out of balance are termed points of disequilibrium. Changes in the conditions of demand or supply will shift the demand or supply curves. This will cause changes in the equilibrium price and quantity in the market. Market Mechanism When buyers (demand) and sellers (supply) meet to exchange goods and services we have a market as shown in the diagram below. Price equilibrium is found where supply and demand are equal. This is the point where both sellers and buyers are happy with the price and quantity. EXAMPLE 1 In the example above equilibrium price is £0.35 and 250 mars bars would be demanded at this price. - If price was £0.40 demand would be less than supply and the market wouldn’t be in equilibrium - If the price was £0.20, demand would be greater than supply and the market wouldn’t be in equilibrium WHEN PRICE IS NOT AT EQUILIBRIUM EXCESS SUPPLY In the first example EQUILIBRIUM is at £0.35 SUPPLY = DEMAND However at £0.40 it is not at equilibrium SUPPLY (300) is greater than DEMAND (200) Therefore we have EXCESS SUPPLY. Price needs to FALL EXCESS DEMAND In the first example EQUILIBRIUM is at £0.35 SUPPLY = DEMAND However at £0.25 it is not at equilibrium SUPPLY (150) is less than DEMAND (350) Therefore we have EXCESS DEMAND. Price needs to INCREASE