Now that we’ve learned about demand and supply function, its time to look at Equilibrium – where demand and supply meet to determine the market price. Demand forecasting helps businesses predict future sales. Both are practical applications of everything covered in demand and supply function and elasticity of demand sections.
What is Equilibrium?
- Equilibrium price = the price at which quantity demanded equals quantity supplied
- Also called the market clearing price or constant price
- Determined by the combined actions of buyers and sellers
- At equilibrium there is no tendency for price to change
| Situation | Result |
|---|---|
| Supply > Demand | Price falls (excess supply) |
| Demand > Supply | Price rises (excess demand) |
| Demand = Supply | Equilibrium price is established |
Changes in Equilibrium — 6 Cases
These cases are very frequently tested in MCQs:
| Case | What changes | Effect on Equilibrium Price |
|---|---|---|
| Case I | Supply constant, demand increases | Price rises |
| Case I | Supply constant, demand decreases | Price falls |
| Case II | Demand constant, supply increases | Price falls |
| Case II | Demand constant, supply decreases | Price rises |
| Case III | Both demand and supply increase in same proportion | Price unchanged |
| Case III | Both demand and supply decrease in same proportion | Price unchanged |
| Case IV | Demand increases more than supply increases | Price rises |
| Case V | Supply increases more than demand increases | Price falls |
| Case VI | Demand increases, supply decreases | Price rises |
| Case VI | Supply increases, demand decreases | Price falls |
Quick Memory Rule for Equilibrium Cases
| Demand | Supply | Price |
|---|---|---|
| ↑ | Constant | ↑ |
| ↓ | Constant | ↓ |
| Constant | ↑ | ↓ |
| Constant | ↓ | ↑ |
| ↑ same proportion | ↑ same proportion | Unchanged |
| ↑ more | ↑ less | ↑ |
| ↑ less | ↑ more | ↓ |
| ↑ | ↓ | ↑ |
| ↓ | ↑ | ↓ |
Demand Forecasting
- Demand forecasting = estimating future demand for a product at the present time
- Success of a business firm depends on accurate demand forecasting
- It helps in planning production, inventory, investment, and cash budgets
5 Methods of Demand Forecasting:
| Method | Explanation |
|---|---|
| Expert opinion method | Experts in the field are consulted to predict future demand |
| Survey of buyers’ intentions | Buyers are directly asked about their future purchase plans |
| Collective opinion method | Sales force / field staff opinions are collected and combined |
| Controlled experiments | Demand is tested in a controlled market setting before full launch |
| Statistical method | Past data is analysed using statistical tools to forecast future demand |
Consumer Behaviour — Quick Revision
This links back to utility (Lesson 1.2) and is tested alongside demand topics:
- Consumption = satisfaction of human wants through use of goods and services
Determinants of Consumption:
- Present income
- Future income
- Wealth
| Concept | Meaning |
|---|---|
| Consumer Surplus | Willing price − Actual price |
| Law of DMU | As consumption increases MU falls |
| Point of saturation | When MU = 0, TU is maximum |
| Negative MU | When TU starts to fall |
Key Concepts to Remember
- Equilibrium = quantity demanded equals quantity supplied
- At equilibrium price there is no excess demand or excess supply
- Demand increases with supply constant → price rises
- Supply increases with demand constant → price falls
- Both increase in same proportion → price unchanged
- Demand increases more than supply → price rises
- Supply increases more than demand → price falls
- Demand up and supply down → price rises; Supply up and demand down → price falls
- Demand forecasting = estimating future demand at present
- 5 methods: expert opinion, survey of buyers, collective opinion, controlled experiments, statistical method
- Consumer surplus = willing price − actual price
Note to Students: These notes are designed for quick revision and MCQ preparation. For detailed explanation with examples, watch our YouTube video lessons. Use these notes alongside practice questions and the full PDF for complete exam preparation.
Practice MCQs for Lesson 1.3 – Part 4
Want more practice?
Download the Full Practice PDF for more questions, better exam-level practice, and to avoid common mistakes. (This also supports the creation of more free tests like this.)
Leave a Reply