Page 6: Market adjustments plus demand and supply
If the market is not in equilibrium it normally adjusts and moves towards the equilibrium. This occurs in either of the following ways:
- In the case of excess demand, consumers require more than the market can currently supply. The market will either increase price, to cut off the excess demand, or suppliers will increase the amount supplied.
- In the case of excess supply, businesses produce more than consumers are willing to buy. The result will be that prices fall to remove the excess or businesses will just produce less.
Both demand and supply measure the amount or quantity that will be demanded or supplied at a particular price. They can therefore be plotted on a graph.
'e' shows the equilibrium position. This is the point where there is no pressure on price to move in either direction. Suppliers are willing to supply x amount at y price, consumers willing to buy x amount at y price.