Market Equilibrium in IB Economics: Where Supply Meets Demand

Market Equilibrium: Where Supply Meets Demand - and Everyone’s (Sort of) Happy

Think about the following situation: you’ve just logged onto Uber after a night out in central London. It’s 2 a.m., you are in Picadilly Circus, the clubs have emptied, and you’re not walking home in those shoes. Suddenly, that £12 ride is now £35. Outrageous? Maybe. But that, my dear economics students, is market equilibrium doing its thing - just with a bit of drama.

Let’s dive into how this all works (minus the hangover).

What Is Market Equilibrium?

Market equilibrium is that magical point where the quantity of a good or service that consumers want to buy (demand) is exactly equal to what producers want to sell (supply) at a particular price.

In a graph, it’s where the demand and supply curves shake hands and go, “This price works for both of us.”

Example: Uber and Lyft use real-time algorithms to keep supply (drivers) and demand (passengers) balanced. If too many people want rides and not enough drivers are out, the price rises. If too many drivers are available and not enough passengers? Prices drop. Voilà - price equilibrium on wheels.

What Messes with Equilibrium?

Oh, plenty. Market equilibrium is delicate. Even a small nudge - say, a change in consumer taste or government policy - can throw everything off.

Example: The rise of veganism shifted demand for oat, almond, and soy milk to the right (yes, we graph geeks say that). That meant higher prices and more quantity traded in the plant-based milk market.

Example: When governments subsidise electric vehicles, supply increases. This pushes the supply curve to the right, leading to lower equilibrium prices and more Teslas, Nio, Zeekr, and Xiaomi (Chinese alternatives) on the road.

Disequilibrium: When the Market’s Out of Whack

Disequilibrium happens when quantity demanded ≠ quantity supplied. It’s like a mismatched online or Tinder date - someone always wants more than the other.

Excess Supply (Surplus)

Price is too high, and sellers can’t offload their goods.

Example: In 2024–25, China saw a milk oversupply due to falling birth rates and tighter wallets. Too much milk, not enough babies = prices drop.

Excess Demand (Shortage)

Price is too low, and buyers can’t get enough.

Example: The global semiconductor chip shortage (2020–22). Everyone wanted laptops, consoles, and cars with fancy chips - but supply couldn’t keep up. The result? Sky-high prices and empty shelves.

Enter at this stage: The Price Mechanism

The price mechanism is the economy’s way of whispering (or shouting): “Hey! We need more of this!” or “Nope, too much of that.”

It does three "cool" things:

1. Signalling - Higher prices signal that something’s scarce.

2. Incentivising - High prices motivate producers to make more (hello, profit).

3. Rationing - When demand exceeds supply, higher prices discourage some consumers from buying.

Example: If wheat becomes scarce due to a drought, prices rise. This signals farmers to grow more (if they can) and encourages buyers to use alternatives. That’s the market rebalancing itself - no government intervention required.

Inelasticity Makes Things…Spicier

Sometimes, price changes barely move the needle on quantity demanded or supplied.

• Inelastic Demand: Think insulin - if the price doubles, diabetics still need it.

• Inelastic Supply: Think avocados. A bad crop year? Prices rocket, but you can’t just grow more overnight (So what do you do?)

That’s why tiny shifts in demand or supply can lead to massive changes in price when curves are steep (inelastic).

Surplus for Everyone

• Consumer Surplus: You’d pay £50 for a concert ticket but only pay £35. That £15 extra? Yours to keep - thanks economics, I appreciate it!

• Producer Surplus: A farmer was willing to sell a box of strawberries for £1 but sells it for £1.50. That extra 50p? Cha-ching! (Let’s try to sell more before the day ends)

Combine the two and you get Community (Social) Surplus - a measure of total happiness in the economy. At equilibrium, it’s maximised!

Allocative Efficiency: The Gold Standard

When marginal benefit (MB) equals marginal cost (MC), you’ve struck economic gold. That’s allocative efficiency - society gets what it wants, resources are used wisely, and everyone (mostly) wins.

By the way, we can show this with a PPC / PPF diagram. Any point on the curve? Efficient. Moving from one point to another? Tricky - someone gains, someone loses. Like the government deciding whether to fund more hospitals or more schools. It’s all about trade-offs.

Final Thought for today

Market equilibrium might seem again like dry theory, but it’s happening around you all the time - from petrol stations to Apple’s pricing strategy, to the cost of Cadbury’s Freddos (don't even get me started…).

So next time you spot a price spike or a sale, remember: the invisible hand of supply and demand is always at work - sometimes pushing you gently, sometimes smacking you in the face with a huge price tag.

Stay well

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