Drawing and interpretation of equilibrium using demand and supply curves

🔍 Objective: Drawing & Interpreting Equilibrium

In the IGCSE Economics syllabus, you’ll need to show how the market price and quantity are decided by the interaction of Demand (D) and Supply (S). The point where the two curves cross is the equilibrium.

📈 Demand Curve

Demand shows how many units buyers want at each price.

• Downward sloping: as price ↓, quantity demanded ↑.
• Key determinants: income, tastes, prices of related goods, expectations, population.

Think of a crowded playground where the price is the number of kids allowed to play. If the playground is free (price = 0), everyone wants to play (high quantity demanded). If the playground charges a high fee, fewer kids will want to play.

📉 Supply Curve

Supply shows how many units producers are willing to sell at each price.

• Upward sloping: as price ↑, quantity supplied ↑.
• Key determinants: input costs, technology, expectations, number of sellers.

Imagine a toy factory that can produce more toys when the market price is high enough to cover costs. When the price is low, the factory produces fewer toys.

⚖️ Finding Equilibrium

Equilibrium occurs where demand equals supply:

$D(P) = S(P)$

1. Write the demand and supply equations.
2. Set them equal: $D(P) = S(P)$.
3. Solve for the equilibrium price $P^*$.
4. Substitute $P^*$ back into either equation to find equilibrium quantity $Q^*$.

Example: If $D(P) = 100 - 2P$ and $S(P) = 20 + 3P$, then:

$100 - 2P = 20 + 3P$ → $5P = 80$ → $P^* = 16$.

Substitute back: $Q^* = 100 - 2(16) = 68$.

📉 What Happens When Price ≠ Equilibrium?

• Price too high (above $P^*$): excess supply (surplus). Sellers lower prices to clear inventory.
• Price too low (below $P^*$): excess demand (shortage). Buyers compete, driving price up.

In the playground analogy: if the fee is too high, fewer kids come, so the playground owner might lower the fee. If the fee is too low, the playground gets overcrowded, so the owner raises the fee.

📝 Exam Tips

• Always label axes (Price on the vertical, Quantity on the horizontal).
• Show the equilibrium point clearly on the graph.
• Explain the movement along the curves (not the curves shifting) when price changes.
• Use the symbolic notation $P^*$ and $Q^*$ to denote equilibrium price and quantity.
• When asked about a surplus or shortage, describe the direction of price change needed to restore equilibrium.

📊 Quick Reference Table

In this table, the equilibrium occurs where $Q_d = Q_s$ (highlighted row). Notice how the price rises as supply increases.