Price formation and market equilibrium
At a flea market, you haggle over every franc; in a shop, the price is clearly marked – but who actually sets it? Here you will find out how supply and demand lead to a market price and what the equilibrium price means. You will learn how to tell when a price is too high or too low – and review your classroom market game.
Das lernst du hier
- I can explain how supply and demand lead to a market price: prices that are too high leave goods unsold, while prices that are too low empty the shelves – the price settles somewhere in between.
- I can explain that the equilibrium price is the price at which the quantity supplied equals the quantity demanded – the market then clears.
- I can describe the consequences of a price that is too high (a surplus, unsold stock) or too low (a shortage, queues) and recognise them in everyday examples.
Liechtensteiner Lehrplan (LiLe): WAH.2.1 (Die Schülerinnen und Schüler können Prinzipien der Marktwirtschaft aufzeigen.), WAH.3.1 (Die Schülerinnen und Schüler können Einflüsse auf die Gestaltung des Konsumalltages erkennen.)
Who set the price?
At a flea market stall, you ask: ‘How much is the skateboard?’ – ‘30 francs.’ – ‘I will give you 15.’ – ‘25.’ – ‘20?’ – ‘Deal.’ In one minute, the two of you have done something quite remarkable: you have negotiated a price that works for both of you.
In a supermarket, there is no haggling – the price is clearly marked. Yet it comes about in much the same way: behind the shop price are the same two forces from “Supply and demand”, supply and demand. Here, though, it is not two people negotiating, but many suppliers and a huge number of buyers – day after day, across the whole economy.
This module accompanies your classroom market game. You have already experienced trading for yourself: perhaps you were a seller who could not sell your goods, or a buyer who had to offer more than planned. Keep your observations from the game in mind – What did you observe in the game? is the reflection question that runs through this module. By the end, you will be able to explain why the prices in your game changed as they did.
Video: How are prices formed?
This explainer video (4:49) from the SRF series ‘Clip und klar!’ shows who decides on prices – and why products become more expensive or cheaper. As you watch, focus on two questions: (1) In the video, who determines the price of a product – the manufacturer alone, or someone else? (2) Follow the fidget spinner example: how does its price change when it becomes a trend – and when the hype dies down? Note what happens to supply and demand in each case.
Transkript anzeigen
This explainer video from SRF Kids (the ‘Clip und klar!’ series, 4:49 minutes) explains how prices are formed: the manufacturer alone does not determine what a product costs – its price emerges on the market through supply and demand. Presenter Raphi uses the fidget spinner as an example: when the toy became a worldwide trend, huge numbers of people wanted one at the same time – high demand met a still limited supply, and prices were high. Then more and more companies produced spinners, and the hype died down: a large supply met low demand – prices fell sharply. Using further examples such as mobile phones, cameras and trainers, the video illustrates the basic rule of price formation: if a good is scarce and sought after, its price rises; if there is plenty of it and few people want it, its price falls.
From haggling to the market price
How does a market find ‘its’ price? Imagine a weekly market with lots of stalls, all selling apricots.
Attempt 1: A stall charges 12 francs per kilo. Most customers look, raise their eyebrows – and move on to the next stall. By the evening, the crates are still full. Anyone who does not want to throw their goods away has to respond: the price falls.
Attempt 2: A stall charges just 2 francs. Within an hour, everything is gone, and there was a long queue – many people missed out. Quite a few would happily have paid more. The stallholder realises: at this price, everyone is rushing to my stall – the price can rise. And someone who can earn more will also offer larger quantities next week.
In this way, the two sides gradually move towards each other – like haggling at a flea market, but with many people involved at once. Somewhere in between is a price at which there are neither full crates left over nor long queues: the quantity supplied equals the quantity demanded. This price is called the equilibrium price – and a market that has found it is said to be in equilibrium.
Remember: nobody calculated this price or ordered it to be set. It emerges on its own from countless individual decisions – every customer who moves on and every supplier who adjusts their price casts a ‘vote’, so to speak.
Market equilibrium in a diagram
You can now put the two curves from “Supply and demand” on the same diagram – that is exactly what the graphic below shows:
- The blue demand curve slopes downwards: the lower the price, the more people want to buy.
- The green supply curve slopes upwards: the higher the price, the more is offered for sale.
- At the intersection, the two forces meet: the quantity supplied equals the quantity demanded. The price at this point is the equilibrium price, and the quantity is called the equilibrium quantity.
At the equilibrium price, we also say: the market clears. This means that all suppliers who want to sell at this price sell their goods – and all buyers who want to buy at this price get what they want. Nothing is left unsold, and nobody queues in vain.
Watch out for a common misunderstanding: ‘clearing’ does not mean that everyone gets the good. Anyone who finds the equilibrium price too high does not buy – they are simply not part of the quantity demanded. Equilibrium is not an ideal outcome for everyone, but the point at which the supply and demand sides meet with nothing left over.
Supply and demand in one diagram
Wird geladen …
Eigene Darstellung, EveryCate, CC BY-SA 4.0
Textbeschreibung anzeigen
The graphic ‘Price formation: Where supply and demand meet’ uses a stylised price–quantity diagram (vertical axis: price, horizontal axis: quantity) to show how supply and demand lead to a market price. The two curves from “Supply and demand” are combined in one diagram here; they show trends, not exact figures. The blue demand curve slopes downwards from top left to bottom right, while the green supply curve slopes upwards from bottom left to top right. At their intersection is the equilibrium point, marked in orange, where supply and demand match. Dashed orange guide lines lead from this point to the equilibrium price on the price axis and the equilibrium quantity on the quantity axis. Key points: (1) If the price is above the equilibrium price (‘Price too high’), a surplus arises between the curves – goods remain unsold (unsold stock). (2) If the price is below the equilibrium price (‘Price too low’), there is a shortage – some people miss out (queues). (3) Only at the equilibrium point does the quantity supplied equal the quantity demanded – the price settles there and the market clears.
When the price is wrong: surpluses and shortages
What happens when the price is not at equilibrium? You know both situations from everyday life – and probably from your market game:
Price too high → surplus. At the high price, suppliers want to sell a lot, but few people want to buy. The difference is left over as unsold stock. A typical example is winter coats in March. At the old price, hardly anyone still wants them – so shops attract customers with discounts in the sales. The discount is simply the price moving back towards equilibrium.
Price too low → shortage. At the low price, lots of people want to buy, but supplying the good is hardly worthwhile – the quantity demanded far exceeds the quantity supplied. The consequences: queues, empty shelves, ‘sold out’. Remember the ticket puzzle from “Supply and demand”? The concert tickets for 80 francs were gone in twenty minutes, and their resale price was several times higher. Now you can solve the puzzle: the official price was below the equilibrium price. Far more fans wanted a ticket than there were places – the shortage drove up the resale price.
Back to your market game – reflection questions:
- In which round did you observe a surplus – who could not sell their goods, and what did they then do to the price?
- Where were there shortages – what sold out quickly, and how did the buyers react?
- Did the prices settle at a particular level over the rounds? Compare this game price with the equilibrium point in the graphic.
Quiz: Price formation and equilibrium
Frage 1 von 8Show what you know about market prices, surpluses and shortages. You can repeat the quiz as often as you like – your best result counts.
What is the equilibrium price?
Price formation: Fill in the terms
Drag the correct terms into the gaps (on a mobile: tap the word first, then the gap). Watch out: Three words in the selection do not fit anywhere.
Tippe zuerst ein Wort an und dann die Lücke, in die es gehört. Antippen einer gefüllten Lücke legt das Wort zurück.
In a free market, nobody sets the price alone – it emerges from the interaction between the sellers' and the buyers' . If suppliers charge too much, some goods remain unsold – these goods are known as : the result is a , and suppliers have to the price. If the price is too low, however, more people want to buy than there are goods available: the result is a , queues form, and the price again. The market therefore settles at the – the price at which the quantity supplied equals the quantity demanded. We then say: the market is . The quantity sold at this price is called the .
Market reactions: Type in the terms
There is no word bank this time – type in the missing terms yourself. Upper and lower case do not matter.
When lots of goods remain unsold at the asking price, we call this . In response, suppliers the price. If a good sells out immediately and people are queuing, this indicates – the price then usually again. At the equilibrium price, the supplied equals the quantity demanded.
Match the situations: surplus, shortage or equilibrium?
Match each situation to the correct market condition: surplus, shortage or equilibrium. Each time, ask yourself: are goods left unsold, do people miss out – or do things work out for both sides?
Tippe zuerst ein Wort an und dann die Lücke, in die es gehört. Antippen einer gefüllten Lücke legt das Wort zurück.
At the school fair's cake stall, 40 slices are left over at the asking price: Fans camp outside a shop for a new model of trainers; after an hour, everything is gone: Day after day, the school kiosk sells almost exactly as many sandwiches as it prepares – with none left over and no queue: Concert tickets sell out in twenty minutes, and many fans miss out: In March, winter coats can only be sold at a large discount: A kiosk orders 200 football sticker albums – after the tournament final, hardly anyone wants them: By Saturday evening, everything at the vegetable stall has been sold, and nobody had to queue in vain: During the winter sports holidays, all the hire skis in Malbun are gone early in the morning; guests arriving later cannot get any: Over the course of the day, a flea market stall sells practically all its games at the marked price:
Going further: Your market game and the equilibrium price
Erkläre in eigenen Worten – so merkst du am besten, was du schon verstanden hast.
Deine Antworten werden auf diesem Gerät gespeichert und gehen mit deinem nächsten Fortschritts-Report an die Lehrperson.
Review your classroom market game (if you have not played it yet, use a scene from a weekly market or flea market instead). Describe a round or scene in which a price was too high or too low: how could you tell? How did the suppliers and buyers react – and in which direction did the price then move? Use the terms surplus, shortage and equilibrium price.
Tipp anzeigen
Signs of a price that is too high: goods remain unsold, sellers advertise or lower the price. Signs of a price that is too low: goods sell out quickly, queues form, buyers are disappointed – and suppliers charge more next time. Describe both sides of the market, not just one.
Explain in your own words – so that someone who has not studied this module could understand – why a market moves back towards equilibrium ‘on its own’ when a price is too high, and why the same happens when a price is too low. OR: Create your own quiz question about a surplus or shortage in the style of this module – with an everyday situation, one correct answer and three wrong answers based on common misconceptions.
Tipp anzeigen
For your explanation, use this chain: price too high → goods remain unsold → suppliers lower the price → quantity demanded rises. And the reverse: price too low → sold out/queues → suppliers raise the price and offer more. For the quiz question, choose a situation with a clear signal: full crates left over, special discounts, queues, ‘sold out’.