Key Idea: Topic 2.3 shows how demand and supply interact to determine the market price and quantity, what happens when equilibrium changes, and how to measure consumer and producer surplus.
✅ Core definitions
- Market equilibrium
- Where Qd = Qs — the market clears with no surplus or shortage.
- Consumer surplus (CS)
- Difference between what consumers are willing to pay and what they actually pay — triangle above P, below D.
- Producer surplus (PS)
- Difference between market price and the minimum producers would accept — triangle below P, above S.
- Community surplus
- CS + PS — total welfare in the market. Maximised at equilibrium (allocative efficiency).
⚖️ Surplus and shortage
- Price above equilibrium → excess supply (surplus) → price falls
- Price below equilibrium → excess demand (shortage) → price rises
- The price mechanism is self-correcting — always pushes toward equilibrium
📊 How equilibrium changes
- D shifts right → P↑ and Q↑ (both rise together)
- D shifts left → P↓ and Q↓ (both fall together)
- S shifts right → P↓ and Q↑ (move in opposite directions)
- S shifts left → P↑ and Q↓ (move in opposite directions)
Memory trick: D shifts → P and Q move in the same direction. S shifts → P and Q move in opposite directions.
🔀 Simultaneous shifts
- When BOTH curves shift, one variable is certain and the other is indeterminate
- Example: D right + S right → Q definitely rises, but P depends on which shift is larger
Always draw the diagram step by step: original equilibrium → shift one curve → shift the other → identify what is certain and what is indeterminate.