Demand and Supply II Market Equilibrium A market is at equilibrium when price has reached the level where quantity supplied equals quantity demanded P1 is equilibrium price Q1 is equilibrium quantity Surplus excess supply Quantity supplied is greater than quantity demanded Notice that the price fall because sellers cutted price this is moving alone supply curve not shifting curve Shortage excess demand Quantity demanded is greater than quantity supplied Notice that the price fall because sellers raised price this is moving alone supply curve not shifting supply curve Movement along Curve vs Curve Shift We can use the supply demand diagram to analyze the effects of any event on a market First determine whether the event shifts one or both curves Second determine the direction of the shifts Third compare the new equilibrium to the initial one CONCLUSION How Prices Allocate Resources Markets are usually a good way to organize economic activity In market economies prices adjust to balance supply and demand These equilibrium prices are the signals that guide economic decisions and thereby allocate scarce resources