Market Equilibrium and Price Changes: Economics 0455 (Cambridge O Level / IGCSE)
Syllabus 2.4, 2.5 · Strand 2 The allocation of resources
- Questions
- 10
- Total marks
- 48
- Tier mix
- 10 Core
0 of 10 questions completed
Syllabus coverage
- 2.4 9 questions completed
- 2.5 9 questions completed
Equilibrium is the price at which the quantity buyers want to purchase exactly matches the quantity sellers want to offer, shown on a diagram as the single point where the demand and supply curves cross, or in a table as the row where the two quantity columns line up. Away from that price the market is in disequilibrium: a price set too low creates a shortage, since buyers demand more than sellers are willing to supply, while a price set too high creates a surplus, since supply exceeds demand.
Because unregulated markets tend to correct themselves, a shortage puts upward pressure on price and a surplus puts downward pressure on it, pulling the market back toward equilibrium. Predicting what happens to equilibrium price and quantity when conditions change means first deciding whether demand or supply has shifted, and in which direction, then redrawing the diagram to see where the curves now intersect. A rightward shift of demand, for instance, raises both equilibrium price and quantity, while a rightward shift of supply lowers price but raises quantity, reasoning that examiners expect to see supported by a labelled diagram, not just a description in words.
The exam-style questions below are original, written to match this syllabus objective, with full worked solutions for each.
Question 1
A homeware shop records the following demand and supply schedule for insulated water bottles, showing the quantity that buyers want to purchase and the quantity that sellers want to offer at different prices.
| Price ($) | Quantity demanded (thousand bottles per month) | Quantity supplied (thousand bottles per month) |
|---|---|---|
| 5 | 100 | 20 |
| 7 | 80 | 40 |
| 9 | 60 | 60 |
| 11 | 40 | 80 |
At which price is the market for insulated water bottles in equilibrium?
Question 2
A garden centre records the following demand and supply schedule for beach umbrellas, showing the quantity that customers want to buy and the quantity that suppliers want to sell each week at different prices.
| Price ($) | Quantity demanded (hundreds of umbrellas per week) | Quantity supplied (hundreds of umbrellas per week) |
|---|---|---|
| 10 | 50 | 10 |
| 15 | 40 | 20 |
| 20 | 30 | 30 |
| 25 | 20 | 40 |
The garden centre currently prices beach umbrellas at $15. Using the table, what is the size and type of the imbalance between quantity demanded and quantity supplied at this price?
Question 3
A stationery shop records the following demand and supply schedule for a particular type of notebook, showing the quantity buyers want to purchase and the quantity sellers want to offer each week at different prices.
| Price ($) | Quantity demanded (packs per week) | Quantity supplied (packs per week) |
|---|---|---|
| 2.00 | 500 | 100 |
| 2.50 | 400 | 200 |
| 3.00 | 300 | 300 |
| 3.50 | 200 | 400 |
| 4.00 | 100 | 500 |
(a) Define market equilibrium, and state the equilibrium price and equilibrium quantity of notebooks shown in the table. [2]
(b) The shop currently sells notebooks at $2.50 per pack. Using the table, identify whether this creates a shortage or a surplus of notebooks, and state its size. [2]
(c) Explain how the price of notebooks at this shop would be expected to change over time, starting from $2.50, until the market reaches equilibrium. [3]
Question 4
A coastal town experiences an unusually long heatwave, and local news channels repeatedly report that the hot weather will continue for several more weeks. As a result, considerably more residents and tourists want to buy sunglasses at every possible price than before. Meanwhile, the cost of producing sunglasses, the number of sunglasses manufacturers in the town, and every other influence on the supply of sunglasses remain exactly the same.
(a) Explain whether this event causes a shift of the demand curve for sunglasses or a movement along it. State the direction of any shift. [3]
(b) Describe, in words, what would happen to a demand and supply diagram for sunglasses as a result of this event, and explain the effect on the equilibrium price and equilibrium quantity of sunglasses in the town. [3]
Question 5
A major aluminium mine unexpectedly closes after flooding, sharply raising the cost of aluminium, the main raw material used to make lightweight city bicycles, while the price of a bicycle itself has not changed. The table below shows the quantity of bicycles demanded each month, together with the quantity supplied at each price both before the mine closure ("original quantity supplied") and after it ("new quantity supplied").
| Price ($) | Quantity demanded (thousand bicycles per month) | Original quantity supplied (thousand bicycles per month) | New quantity supplied (thousand bicycles per month) |
|---|---|---|---|
| 150 | 70 | 30 | 10 |
| 200 | 60 | 40 | 20 |
| 250 | 50 | 50 | 30 |
| 300 | 40 | 60 | 40 |
| 350 | 30 | 70 | 50 |
(a) State the original equilibrium price and equilibrium quantity of bicycles, before the aluminium mine closure. [2]
(b) Explain why the rise in the cost of aluminium causes a shift of the supply curve for bicycles rather than a movement along it, and state the direction of this shift. [3]
(c) Using the "new quantity supplied" column, state the new equilibrium price and equilibrium quantity of bicycles after the mine closure, and describe the overall change in equilibrium price and equilibrium quantity caused by the rise in the cost of aluminium. [3]
Question 6
A market stall records the following demand and supply schedule for wireless phone chargers, showing the quantity that customers want to buy and the quantity that sellers want to offer each week at different prices.
| Price ($) | Quantity demanded (hundreds of chargers per week) | Quantity supplied (hundreds of chargers per week) |
|---|---|---|
| 8 | 60 | 20 |
| 10 | 50 | 30 |
| 12 | 40 | 40 |
| 14 | 30 | 50 |
The stall currently prices chargers at $14. Using the table, what is the size and type of the imbalance between quantity demanded and quantity supplied at this price?
Question 7
A farmers' market stall records the following demand and supply schedule for punnets of strawberries, showing the quantity buyers want to purchase and the quantity sellers want to offer each week at different prices.
| Price ($) | Quantity demanded (punnets per week) | Quantity supplied (punnets per week) |
|---|---|---|
| 3.00 | 600 | 200 |
| 3.50 | 500 | 300 |
| 4.00 | 400 | 400 |
| 4.50 | 300 | 500 |
| 5.00 | 200 | 600 |
(a) Define market equilibrium, and state the equilibrium price and equilibrium quantity of strawberries shown in the table. [2]
(b) The stall currently sells strawberries at $4.50 per punnet. Using the table, identify whether this creates a shortage or a surplus of strawberries, and state its size. [2]
(c) Explain how the price of strawberries at this stall would be expected to change over time, starting from $4.50, until the market reaches equilibrium. [3]
Question 8
A convenience store sells a well-known brand of sugary soda. A national health advisory warns of the risks of high sugar intake, and a widely-reported campaign encourages people to drink less sugary soda. As a result, considerably fewer customers want to buy this soda at every possible price than before. Meanwhile, the store's production and delivery costs, and every other influence on the supply of this soda, remain exactly the same.
What happens to the equilibrium price and equilibrium quantity of this soda at the store as a result of the health advisory?
Question 9
A wholesale fruit market sells crates of tomatoes. An unusually favourable growing season produces a bumper harvest, significantly lowering the average cost of growing and harvesting tomatoes per crate, while the price of a crate of tomatoes itself has not changed. The table below shows the quantity of tomato crates demanded each day, together with the quantity supplied at each price both before the bumper harvest ("original quantity supplied") and after it ("new quantity supplied").
| Price ($) | Quantity demanded (crates per day) | Original quantity supplied (crates per day) | New quantity supplied (crates per day) |
|---|---|---|---|
| 20 | 140 | 60 | 100 |
| 25 | 120 | 80 | 120 |
| 30 | 100 | 100 | 140 |
| 35 | 80 | 120 | 160 |
| 40 | 60 | 140 | 180 |
(a) State the original equilibrium price and equilibrium quantity of tomato crates, before the bumper harvest. [2]
(b) Explain why the fall in the cost of growing and harvesting tomatoes causes a shift of the supply curve for tomatoes rather than a movement along it, and state the direction of this shift. [3]
(c) Using the "new quantity supplied" column, state the new equilibrium price and equilibrium quantity of tomato crates after the bumper harvest, and describe the overall change in equilibrium price and equilibrium quantity caused by the fall in growing costs. [3]
Question 10
A national retailer sells reusable canvas tote bags online. Two developments happen at around the same time. First, growing environmental awareness means considerably more shoppers want to buy tote bags at every possible price than before. Second, several new overseas factories start manufacturing tote bags using cheaper materials, meaning sellers are willing and able to supply substantially more tote bags at every possible price than before. The price of a tote bag itself has not changed as a direct cause of either development.
The table below shows the quantity of tote bags demanded and supplied each month, both before ("original") and after ("new") these two developments.
| Price ($) | Original Qd | New Qd | Original Qs | New Qs |
|---|---|---|---|---|
| 10 | 110 | 130 | 50 | 90 |
| 15 | 100 | 120 | 60 | 100 |
| 20 | 90 | 110 | 70 | 110 |
| 25 | 80 | 100 | 80 | 120 |
| 30 | 70 | 90 | 90 | 130 |
(Quantities are in hundreds of tote bags per month.)
(a) State the original equilibrium price and equilibrium quantity of tote bags, before either development occurred. [2]
(b) Using the "New Qd" and "New Qs" columns, state the new equilibrium price and equilibrium quantity of tote bags after both developments. [2]
(c) Explain why the equilibrium quantity of tote bags has risen while the equilibrium price has fallen, even though demand for tote bags has increased. [4]