Page 105 - Microsoft Word - 00 ACCA F1 Notes Prelims.docx

External analysis – economic factors

The price mechanism

5.1 Equilibrium

 Equilibrium price set by the interaction of supply and demand

P
D S

P eqm

Q
Q eqm

Price higher than equilibrium Price lower than equilibrium

P P
D S D S
S > D
P 1

P 2
D > S

Q Q

Excess supply – producers drop prices Excess demand – shortages force
to clear surplus prices up

99