A) Equilibrium price and quantity

The equilibrium price is determined by the forces of supply and demand. It occurs where the supply curve and demand curve meet.

At this point, quantity supplied is equal to quantity demanded. The market is therefore able to clear. The equilibrium price is also known as the market clearing price.

B) Excess supply and excess demand

If the market price is above equilibrium, quantity supplied will be greater than quantity demanded. This creates excess supply.

If the market price is below equilibrium, quantity demanded will be greater than quantity supplied. This creates excess demand.

C) How market forces restore equilibrium

When there is excess supply, firms have an incentive to reduce their prices so that they can sell their remaining goods. As price falls, quantity demanded increases while quantity supplied falls, moving the market towards equilibrium.

When there is excess demand, there is upward pressure on price. A higher price reduces quantity demanded and encourages firms to increase quantity supplied, again moving the market towards equilibrium.

What the full guide adds

For this topic, the full AS guide also covers:

• A fuller step-by-step explanation of how market forces remove excess supply and excess demand and return the market to its clearing price.
• How a decrease or increase in demand changes both equilibrium price and equilibrium quantity.
• How a decrease or increase in supply changes both equilibrium price and equilibrium quantity.
• Supply and demand diagrams showing these shifts, including the new equilibrium after the market changes.
• Fuller explanation of how prices ration excess demand and provide incentives to consumers and producers as the market adjusts.