Price determination

equilibrium price

1. Price&Determina,on&
EdExcel'Economics'1.2.6'

2. Determina,on&of&Equilibrium&Market&Prices&
• Equilibrium'means'a'state&of&
equality&or&balance'between'
market'demand'and'supply'
• Prices'where'demand'and'
supply'are'out'of'balance'are'
called'points'of'disequilibrium.''
• Most'demand'&'supply'exam'
ques@ons'present'the'student'
with'an'event(s)'that'causes'
either'the'demand'or'supply'
curve'(or'both)'to'shiD.'The'
student'is'then'expected'to'
find&and&analyse&the&new&
equilibrium.'
Market'
Supply'
Market'
Demand'

3. Equilibrium&Market&Prices&–&Supply&and&Demand&Table&
Price& Quan,ty&demanded&Quan,ty&supplied&
£20' 6,000' 8,000'
£18' 7,000' 8,000'
£16& 8,000& 8,000&
£14' 9,000' 8,000'
£12' 10,000' 8,000'
A'football'club'has'a'fixed'stadium'capacity'of'8,000'seats'and'has'
es@mated'the'level'of'demand'at'different'@cket'prices'as'follows:'
The'equilibrium'price'in'this'situa@on'is'£16'where'quan@ty'demanded'
and'supplied'='8,000'@ckets.'Supply'&'demand'in'balance.'

4. Equilibrium&Prices&in&a&Supply&and&Demand&Diagram&
Price'of'
Wheat'
Quan@ty'of'wheat'
Market'
Supply'
Pe'
Qe'
Equilibrium'is'a'state'of&balance&between'market'demand'and'
supply'–'there'is'no&excess&demand&or&supply&
Market'
Demand'
Pe'is'also'known'as'
the'“market'
clearing'price”&

5. Disequilibrium&–&Excess&Supply&
Price'of'
Wheat'
Quan@ty'of'Wheat'
Market'
Supply'
Pe'
Qe'
If'the'current'market'price'was'P2,'there'would'be'an'excess&
supply&–'of'Q2'–'Q3,'this'will'put'downward&pressure&on&price&
Market'
Demand'
P2'
Q2' Q3'
Excess'supply'

6. Disequilibrium&–&Excess&Demand&
Price'of'
Wheat'
Quan@ty'of'Wheat'
Market'
Supply'
Pe'
Qe'
If'the'current'market'price'was'P1,'there'would'be'an'excess&
demand&–'of'Q1'–'Q4,'this'will'put'upward&pressure&on&price&
Market'
Demand'
P1'
Q1' Q4'
Excess'demand'

7. Equilibrium&Market&Prices&–&Changes&in&Demand&
Price&per&
kg&
Quan,ty&&
demanded&(1)&
Quan,ty&
supplied&
Quan,ty&&
demanded&(2)&
£10' 100' 380' 240'
£9' 130' 340' 270'
£8' 160' 300& 300&
£7' 190' 260' 330'
£6& 220& 220& 360'
£5' 250' 180' 390'
The'demand'for'and'supply'of'fresh'fish'in'a'local'market'is'shown'
in'the'table'below.'The'original'equilibrium'price'is'£6'per'kg'
If'market'demand'rises'by'80kg'at'each'and'every'price,'then'the'
new'equilibrium'price'will'be'£8'with'300kg'bought'and'sold'

8. Changes&in&Equilibrium&Prices&–&Increasing&Demand&
Price'of'
Coffee'
Quan@ty'of'Coffee'
Market'
Supply'
P1'
Q1'
An'outward'shiD'of'market'demand'(ceteris'paribus)'leads'to'a'
rise'in'equilibrium'price'and'an'expansion'of'market'supply'
Market'
Demand'(1)'
Market'
Demand'(2)'
P2'
Q2'
If'price'did'not'rise'from'P1'aDer'
a'shiD'in'demand'from'D1'to'D,'
there'would'be'excess'demand'

9. Equilibrium&Market&Prices&–&Changes&in&Supply&
Price&per&
kg&
Quan,ty&&
demanded&(1)&
Quan,ty&
supplied&&
Quan,ty&&
Supplied&(2)&
$40' 2,000' 3,800' 4,700'
$35' 2,500' 3,400' 4,300'
$30' 3,000& 3,000& 3,900'
$25' 3,500& 2,600' 3,500&
$20' 4,000' 2,200' 3,100'
$15' 4,500' 1,800' 2,700'
The'demand'for'and'supply'of'cocoa'beans'in'a'local'market'is'
shown'in'the'table'below.'The'original'equilibrium'price'is'$30.'
If'market'supply'increases'by'900'tonnes'at'each'price,'then'the'
new'equilibrium'price'will'be'£25'with'3,500'tonnes'bought'&'sold'

10. Changes&in&Equilibrium&Prices&–&Increasing&Supply&
Price'of'
Coffee'
Quan@ty'supplied'
Market'
Supply'(1)'
Pe'
Qe'
An'outward'shiD'of'market'supply'(ceteris'paribus)'will'lead'to'
a'fall'in'equilibrium'price'and'an'expansion'of'market'demand'
Market'
Demand'(1)'
P2'
Q2'
Market'
Supply'(2)'
0'

11. Changes&in&Equilibrium&Prices&–&Decreasing&Demand&
Price'of'
Coffee'
Quan@ty'supplied'
Market'
Supply'(1)'
Pe'
Qe'
An'inward'shiD'of'market'demand'(ceteris'paribus)'leads'to'a'
fall'in'equilibrium'price'and'a'contrac@on'of'market'supply'
Market'Demand'(1)'
P2'
Q2'
Market'Demand'(2)'
0'

12. Changes&in&Equilibrium&Prices&–&Decreasing&Supply&
Price'of'
Coffee'
Quan@ty'supplied'
Market'
Supply'(1)'
Pe'
Qe'
An'inward'shiD'of'market'supply'(ceteris'paribus)'leads'to'a'
rise'in'equilibrium'price'and'a'contrac@on'of'market'demand'
Market'Demand'(1)'
P2'
Q2'
Market'
Supply'(2)'
0'

13. Moving&from&one&Market&Equilibrium&to&another&
Price'of'
Rubber'
Quan@ty'
P1'
Q1'
An'increase'in'demand'in'the'immediate'period'leads'to'the'
price'rising'to'P2,'before'an'expansion'of'supply'takes'effect'
Demand'(1)'
P3'
Q2'
Supply'(1)'
Demand'(2)'
P2'
A&
B&
C&
0'

14. ShiSs&in&both&Market&Supply&and&Market&Demand&
Price'of'
Buaer'
Quan@ty'
P1'
Q1'
In'this'example'the'size'of'the'outward'shiD'of'market'supply'
exceeds'the'increase'in'market'demand.'Both'factors'cause'
quan@ty'bought'and'sold'to'rise;'but'the'market'price'will'fall.'
D1'
P3'
Q2'
S1'
P2'
S2'
D2'
Q3'
A&
B&
C&
0'

15. Explaining&Possible&Changes&in&Beef&Prices&
Price'of'
Beef'
Quan@ty'of'beef'
Average&retail&price&of&beef&in&the&UK&
£'per'kg
2010 6.16
2011 6.42
2012 6.99
2013 7.47
What'demand'&'supply'factors'might'
explain'the'rising'price'of'beef?'
Demand&Factors&Supply&Factors&
Rise'in'price'of'beef'
subs@tutes'
Increase'in'price'of'
animal'foodstuffs'
Rising'real'incomes'
if'YED'>'0'
Higher'rents'paid'
by'beef'farmers'
Change'in'tastes'
and'preferences'
Rise'in'wages'of'
farm'labourers'
D1' D2'
S1'
S2'
P1'
P2'
0'

16. Real&World:&Explaining&Changes&in&UK&Footwear&Prices&
80'
85'
90'
95'
100'
105'
110'
2003'2004'2005'2006'2007'2008'2009'2010'2011'2012'2013'2014'
Consumer'price'index'for'footwear'products'in'UK'
Global'compe@@on'
from'lower'cost'
countries'
Intense'retail'
compe@@on'on'the'
high'street'and'
online'
Falling'input'costs'
have'increased'
market'supply'
Strong'exchange'rate'
–'which'makes'
imports'of'shoes'
cheaper'

17. Likely&Effects&of&Changes&in&UK&Wheat&Prices&
0'
20'
40'
60'
80'
100'
120'
140'
160'
180'
200'
2002'2003'2004'2005'2006'2007'2008'2009'2010'2011'2012'2013'2014'2015*'
Price'per'tonne'in'£s'
UK'wheat'price,'average'price'per'tonne'(£)'
• Lower'prices'may'cause'a'
contrac@on'of'wheat'supply'
Produc@on'
• Lower'revenues'might'
damage'incomes'for'farmers'
Revenues'and'Profits'
• Bread'manufacturers'will'
benefit'from'lower'wheat'
prices'–'their'input'costs'
have'fallen'
Manufacturing'costs'

18. Equilibrium&Prices&and&Producer&Revenue&
Price'of'
Rubber'
Quan@ty'supplied'
P1'
Q1'
An'outward'shiD'of'demand'will'lead'to'a'higher'price,'an'
expansion'of'produc@on'and'a'rise'in'total'producer'revenue'
Demand'(1)'
P2'
Q2'
Supply'(1)'
Demand'(2)'
Total'revenue'
at'the'higher'
market'price'
0'
Total'revenue'='
market'price'x'
quan@ty'sold'

19. Summary&of&Changes&in&Equilibrium&Prices&
Equilibrium'prices'change'when'condi@ons'of'demand/supply'alter'
ShiS& Equilibrium&Price&Equilibrium&Quan,ty&
Demand'increases& Higher& Higher'
Demand'decreases& Lower& Lower'
Supply'increases& Lower& Higher'
Supply'decreases& Higher& Lower'
In'analysing'price'changes,'iden@fy'relevant'supply/demand'factors'

20. Summary&of&Changes&in&Equilibrium&Prices&
Demand Supply
Equilibrium&
Price
Equilibrium&
Quan,ty
+ + ? +
+ 0 + +
+ q + ?
0 + q +
0 0 0 0
0 q + q
q + q +
q 0 q q
q q ? q
The'possible'outcomes'for'price'and'quan@ty'are'less'certain'when'
there'is'more'than'one'change'in'demand'and'supply'condi@ons'

21. Regulated&Prices&and&Industry&Regulators&
• Not'all'prices'are'set'by'the'freeq
market'forces'of'supply'and'demand.''
• In'Britain,'a'number'of'prices'are'
affected'by'regulators'who'may'
impose'a'pricing'formula'on'suppliers'
• Good'examples'are'rail&fares,'the'cost'
of'postage'stamps'and'water'bills.'
• In'the'UK'rail'industry,'some'fares'are'
unregulated'allowing'train'opera@ng'
companies'to'set'their'own'prices.''
• But'around'half'of'the'fares'charged'
for'rail'travellers'are'set'by'the'rail'
regulator.''
The'EU'has'capped'
mobile'phone'
roaming'charges'
Many'rail'fares'in'the'
UK'are'heavily'
regulated'

22. 9'
8'
6'
0'
1'
2'
3'
4'
5'
6'
7'
8'
9'
10'
July'2012'July'2013'July'2014'
Price'cap'in'Euro'cents''
Mobile&Phone&Price&Caps&Set&by&the&European&Union&
70'
45'
20'
0'
10'
20'
30'
40'
50'
60'
70'
80'
July'2012'July'2013'July'2014'
Price'cap'in'Euro'cents'per'MB''
EU'Price'caps'on'text&
messages&(SMS)''
EU'Price'caps'on'mobile&
data&roaming&&
ADer'interven@on'by'the'EU'Compe@@on'Commission,'from'15'June'2017,'those'travelling'
within'the'EU'will'be'able'to'use'their'mobile'internet'abroad'at'no'extra'charge.'

23. Consumer&Price&Index&for&UK&Rail&Fares&2003\2014&
92.5'
96.3'
100'
104.2'
109.4'
114.2'
120.6'
130.5'
139.3'
146.3'
152'
157'
0'
20'
40'
60'
80'
100'
120'
140'
160'
180'
2003'2004'2005'2006'2007'2008'2009'2010'2011'2012'2013'2014'
Consumer'price'index'for'rail'fares'2005=100'
Around'45'per'cent'of'UK'rail'fares'are'subject'to'regula@on'(since'2015'this'is'
limited'to'the'rate'of'RPI'infla@on.'All'other'fares'are'set'at'a'commercial'rate'by'
the'train'opera@ng'companies'such'as'First'Great'Western'and'Virgin'Trains'

24. Price&Determina,on&
EdExcel'Economics'1.2.6'