A market clears when price moves until buyers and sellers want the same quantity. This page covers excess demand, excess supply and the three functions of price, with a diagram you can reproduce in the exam.
Why does the same flight cost three different prices in one week?
Equilibrium price is where quantity demanded equals quantity supplied. Above it, excess supply pushes price down. Below it, excess demand pushes price up. Price rations scarce goods, gives incentives to buyers and sellers, and signals where resources are wanted. A shift in demand or supply moves the equilibrium.
A competitive market has many buyers and many sellers. Each is too small to set the price alone. Price is set by the interaction of demand (what buyers are willing and able to buy at each price) and supply (what firms are willing and able to sell at each price).
Equilibrium price is the price at which quantity demanded equals quantity supplied. At that price the market clears, so no buyer who is willing to pay it goes without and no seller is left with unsold stock. Nobody has a reason to change their behaviour, so price stays put until something shifts demand or supply.
Dynamic pricing is this process sped up. Airlines and ticket sellers adjust price as demand and the number of unsold seats change. So the same flight can have several prices in one week.
The left panel of Figure 1 shows disequilibrium. At price P1, above equilibrium, firms supply more than buyers want. Unsold stock builds up, so firms cut price. As price falls, quantity demanded rises and quantity supplied falls. This continues until the gap closes at P*.
At price P2, below equilibrium, buyers want more than firms supply. Stocks run out and buyers compete, so price rises. Higher price raises quantity supplied and cuts quantity demanded until the market clears.
The right panel shows a change in equilibrium. A rise in demand shifts the demand curve to the right. At the old price there is now excess demand, so price rises. The rise in price is an extension along the supply curve, not a shift of it. Quantity traded rises too.
Illustrative figures: Qd = 120 − 4P and Qs = 20 + 6P, where P is in pounds. Setting Qd = Qs gives 100 = 10P, so P = £10 and Q = 80 units.
At £12, Qd = 72 and Qs = 92, so excess supply is 20 units. At £8, Qd = 88 and Qs = 68, so excess demand is 20 units.
Now demand rises to Qd = 140 − 4P. Then 120 = 10P, so the new price is £12 and the new quantity is 92 units. Price and quantity both rise because demand shifted and supply did not.
Markets do not clear instantly. How fast price adjusts depends on how easily firms can change price and output. Seats on a flight can be repriced within minutes. Housing takes months, because supply is slow to respond.
The size of the price and quantity change depends on elasticity. Price elasticity of demand (PED) measures how responsive quantity demanded is to a change in price. Price elasticity of supply (PES) measures the same for supply. If supply is inelastic, a rise in demand mostly raises price. If supply is elastic, it mostly raises quantity.
A maximum price set below equilibrium creates excess demand. Price can no longer ration the good, so something else must. That may be queues, waiting lists or supply simply running short.
Britain's energy price cap shows this. The cap is set by Ofgem, the UK energy regulator. It limits what suppliers can charge households on default tariffs.[2] From April 2022 the average annual cap rose to £1,971, which was 54% above the £1,277 level it had been at.[5] The cap was not a shortage of energy. It was a squeeze on suppliers who had bought gas at higher prices than they could charge.
The adjustment appeared elsewhere. Many suppliers failed, and 4.3 million customers of failed suppliers were moved by Ofgem.[1] The market kept clearing for households, but the cost fell on firms and later on taxpayers.
Most lost marks on this topic come from a small set of habits. Each is easy to fix once you know it.
The economics is the same on every board; the question format is what changes. Most questions on this topic take one of six shapes. Open each to see how the topic appears in it and what earns the marks. All questions here are original Curriculum Circle practice questions, not board questions.
On this topicVery common. Expect questions on which curve shifts, what happens to price after a shift, or identifying excess demand from a table.
What earns the marksAO1 for definitions and AO2 for reading a table or diagram.
CC practice questionA rise in the cost of raw materials shifts the supply curve left. What happens to equilibrium price and quantity? (1 mark)
On this topicAppears as finding equilibrium from two equations, or excess demand or supply from a table at a given price.
What earns the marksAO1 for the formula and AO2 for applying it correctly.
CC practice questionIllustrative figures: Qd = 150 − 5P and Qs = 30 + 5P. Calculate the equilibrium price and quantity. (3 marks)
On this topicCommon. Often asks you to explain how price reaches equilibrium or what a function of price does.
What earns the marksAO1 for the term, AO2 for context and AO3 for the chain of reasoning.
CC practice questionExplain how the price mechanism ensures a market for concert tickets reaches equilibrium. (6 marks)
On this topicVery common. You draw a demand and supply diagram, show a shift and explain the effect on price and quantity.
What earns the marksAO2 for the context and AO3 for a developed chain of analysis using the diagram.
CC practice questionUsing a demand and supply diagram, analyse the likely effect of a rise in incomes on the market for new cars. (9 marks)
On this topicOften through a price cap or minimum price in an extract. You must weigh up who gains, who loses and what the outcome depends on.
What earns the marksAO1 to AO4, with AO3 and AO4 carrying most of the marks.
CC practice questionEvaluate the view that a cap on the price of household energy is the best way to protect low-income households. (15 marks)
On this topicOccasional as a stand-alone essay, because the topic is a base for others. It can appear as 'how well do markets allocate resources'.
What earns the marksAO1 to AO4, with a supported judgement deciding the top band.
CC practice question'Price is the most efficient way to allocate scarce resources.' Discuss. (25 marks)
| Weight | What it is | What it means on the determination of equilibrium market prices | |
|---|---|---|---|
| AO1 | 20–23% | Knowledge and understanding of terms, concepts, theories and models | Know the definitions of equilibrium, excess demand and excess supply, and name the three functions of price correctly. |
| AO2 | 26–29% | Application to economic contexts | Apply the model to the market in the question, such as tickets, flights or energy, and use the data given in the extract. |
| AO3 | 26–29% | Analysis of issues and their impact on economic agents | Build the chain: shift, excess demand or supply, change in price, extension or contraction along the other curve, new equilibrium. |
| AO4 | 22–25% | Evaluation, using evidence to reach a judgement | Judge how fast the market clears, how elastic the curves are, and whether a cleared market is a fair or desirable outcome. |
Weightings are approximate and taken from the AQA A-level Economics 7136 specification [0]. Edexcel and IAL weight the objectives differently, but they test the same four skills.
Evaluate the view that governments should cap the price of an essential good such as household energy. (15 marks)
A cap set below equilibrium means quantity demanded exceeds quantity supplied at the capped price. Excess demand appears, so price can no longer ration the good. Suppliers face a price below their cost, so the incentive to supply falls and some may leave the market. Households get a lower bill, so low-income households gain in the short run.
The result depends on how elastic supply is and how long the cap lasts. If wholesale costs are volatile, as in 2022, a cap fixed below cost causes supplier failures, as 29 suppliers collapsed between July 2021 and May 2022.[1] The cost then reappears as higher prices later or as taxpayer support. A cap is more defensible if it tracks costs and is temporary. A targeted payment to low-income households protects them without breaking the price signal. On balance, a cap that follows costs is justified for an essential good, but it needs to be paired with targeted help for those who cannot afford the price.
Ofgem, the UK energy regulator, raised the average annual price cap to £1,971 from April 2022, a 54% rise from £1,277.[5] It had been cut off from wholesale costs, which had risen faster.
Bulb Energy collapsed in November 2021, in what was reported as the biggest ever energy supplier failure, affecting 1.7 million household customers.[6] The Guardian linked the failures to a cap on what suppliers could charge while their costs rose.[6]
The cap reached £3,549 for a typical household in October 2022.[3] The government's Energy Price Guarantee, introduced in October 2022, held the typical bill at £2,500 a year, so the gap was met by public money.[4]
Everything above is the topic page. The pieces below take it further. Each one trains a particular assessment objective rather than covering the topic again, and they are added over the year.
Figures and facts were checked against these sources on 2 November 2026. Worked numbers labelled "Illustrative figures" are invented for teaching.
The CC Economics revision platform drills equilibrium and shift questions, and the Inner Academy covers the topic in recorded lessons.
See the Economics platformThe Inner Academy