A market is in equilibrium when quantity demanded equals quantity supplied. At any other price there is a shortage or a surplus, and the price moves back toward equilibrium unless a law stops it. Set a price, shift the curves, or add a price ceiling or floor, and read what an AP answer would say.
The market starts in equilibrium at a price of $10.00 a pound and 100 pounds a week. Dashed grey lines show the starting curves once something shifts. The price line shows a price that is not set by the market: a temporary price, a ceiling, or a floor.
Equilibrium is the price where quantity demanded equals quantity supplied. Every buyer who wants the good at that price gets it, and every seller finds a buyer. Nothing pushes the price up or down.
Quantity demanded is greater than quantity supplied. Buyers compete for the limited goods and sellers raise prices. As the price rises, quantity demanded falls and quantity supplied rises until the shortage is gone.
Quantity supplied is greater than quantity demanded. Sellers have unsold goods and cut prices. As the price falls, quantity demanded rises and quantity supplied falls until the surplus is gone.
A change in the good's own price moves the market along the curves. Only a change in a determinant (income, tastes, input costs, technology, number of sellers) shifts a curve. Shortages and surpluses fix themselves through movements along the curves.
When demand and supply both shift, you know the direction of only one of price or quantity. The other depends on which shift is larger. Without the sizes, the AP answer is "indeterminate."
A price ceiling is a legal maximum; it binds only when set below equilibrium and causes a shortage. A price floor is a legal minimum; it binds only when set above equilibrium and causes a surplus. Either way, the quantity sold falls.
Memorize the four double-shift rules. A quick check: if both shifts push price the same way, price is certain and quantity is indeterminate. If both push quantity the same way, quantity is certain and price is indeterminate.
| Change | Curve shift | Equilibrium price | Equilibrium quantity |
|---|---|---|---|
| Demand increases (income rises for a normal good, substitute's price rises) | D right | ↑ | ↑ |
| Demand decreases (complement's price rises, tastes shift away) | D left | ↓ | ↓ |
| Supply increases (better technology, more sellers, lower input costs) | S right | ↓ | ↑ |
| Supply decreases (higher input costs, bad weather) | S left | ↑ | ↓ |
| Demand increases and supply increases | Both right | Indeterminate | ↑ |
| Demand decreases and supply decreases | Both left | Indeterminate | ↓ |
| Demand increases and supply decreases | D right, S left | ↑ | Indeterminate |
| Demand decreases and supply increases | D left, S right | ↓ | Indeterminate |
| Binding price ceiling (set below equilibrium) | No shift | Held below equilibrium | Quantity sold falls to Qs; shortage = Qd − Qs |
| Binding price floor (set above equilibrium) | No shift | Held above equilibrium | Quantity sold falls to Qd; surplus = Qs − Qd |
AP-style multiple choice. Pick an answer to see the explanation.
The vocabulary for topic 1.6. Read the list, flip through flashcards, or quiz yourself. For every term in the unit, see the Unit 1 terminology guide.