Economics · Lesson 5

Price determination, equilibrium & price control

JAMBWAECNECO

What the syllabus asks

JAMB: Theory of price determination: the concepts of market and price; functions of the price system; equilibrium price and quantity in product and factor markets; price legislation and its effects; the effects of changes in supply and demand on equilibrium price and quantity

WAEC: Price determination: market, equilibrium price and quantity, effects of changes in demand and supply on equilibrium; price control (maximum and minimum prices) and its effects; rationing, black market, hoarding; functions of the price system

NECO: Price determination: market, equilibrium price and quantity, effects of changes in demand and supply on equilibrium; price control (maximum and minimum prices) and its effects; rationing, black market, hoarding; functions of the price system

What you will learn

Explain the meaning of market and price, and types of markets.
Determine equilibrium price and quantity from schedules, graphs and simple equations.
Explain how a market moves to equilibrium from a surplus or shortage.
Analyse the effects of changes in demand and supply on equilibrium.
Explain maximum and minimum price legislation and their effects (shortages, rationing, black market, surplus).
State the functions of the price system.

Key points

A market is any arrangement bringing buyers and sellers into contact; no place is needed.
Equilibrium: Qd = Qs; the market clears.
Above equilibrium: surplus, price falls; below: shortage, price rises.
D ↑: P ↑ Q ↑; D ↓: P ↓ Q ↓; S ↑: P ↓ Q ↑; S ↓: P ↑ Q ↓.
When both shift, one effect is certain and the other depends on sizes.
Price functions: rationing, signalling, incentive, allocation.
Maximum price below equilibrium: shortage, queues, rationing, black market, hoarding.
Minimum price above equilibrium: surplus, buffer stocks; minimum wage may cause unemployment.
Buffer stocks stabilise farm prices.
Consumer surplus: area under demand above price.

Start here: Market and price

In everyday speech a "market" is a place like Onitsha Main Market or Balogun Market. In economics the meaning is wider.

A market is any arrangement or network through which buyers and sellers of a good or service are brought into contact to exchange it at an agreed price. A physical place is not necessary.

Trading by phone, by online shopping apps, or through a stockbroker on the stock exchange are all markets. What matters is contact between buyers and sellers and an agreed price.

Types of markets

By goods traded: commodity (product) markets, e.g. the market for rice; factor markets, e.g. the labour market; financial markets, e.g. money and capital markets (Topic ec17); foreign exchange market.
By area: local, regional, national and international (world) markets.
By time: very short (momentary), short-run and long-run markets.
By competition: perfect and imperfect markets (Topic ec9).

Price is the value of a good expressed in money: the amount of money given in exchange for one unit.

In markets with many buyers and sellers, price is not set by any one person; it emerges from demand and supply. In other cases price is fixed by a monopolist, by bargaining (haggling, common in Nigerian open markets), by auction, or by government (price control).

Worked example 5.1

Is a WhatsApp group where farmers post photos of tomatoes and buyers order them a market? Explain.

Buyers and sellers are in contact.
They agree prices and exchange the goods.
No physical place is needed.

Yes, it is a market.

⚠️ Common mistake: defining a market as "a place where goods are bought and sold". Examiners want "an arrangement that brings buyers and sellers into contact", and a remark that a location is not necessary.

Try it yourself. Name two ways prices are fixed other than by demand and supply.

Show solution

Bargaining (haggling), auction, government price control, or monopoly pricing (any two).

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Practice questions

1. Equilibrium price is the price at which

quantity demanded equals quantity supplied
government fixes the price
sellers make the most profit
demand is greatest

Show answer

A: quantity demanded equals quantity supplied
The market clears.

2. If market price is above equilibrium, there will be

a shortage, and price will tend to rise
no change
a black market
a surplus, and price will tend to fall

Show answer

D: a surplus, and price will tend to fall
Excess supply pushes price down.

3. Qd = 100 − 2P and Qs = 20 + 2P. The equilibrium price is

Show answer

C: 20
100 − 2P = 20 + 2P → 4P = 80 → P = 20; Q = 60.

4. In the question above (Qd = 100 − 2P, Qs = 20 + 2P), the equilibrium quantity is

Show answer

B: 60
Q = 100 − 2(20) = 60.

5. An increase in demand with supply unchanged leads to

higher price and higher quantity
lower price and higher quantity
higher price and lower quantity
lower price and lower quantity

Show answer

A: higher price and higher quantity
D shifts right along an upward supply curve.

Key words

Market: Any arrangement through which buyers and sellers exchange goods and services and agree a price.
Price: The amount of money paid for a unit of a good; its value in money.
Equilibrium price: The price at which quantity demanded equals quantity supplied.
Equilibrium quantity: The quantity bought and sold at the equilibrium price.
Excess demand: Quantity demanded greater than quantity supplied at a price; a shortage.
Excess supply: Quantity supplied greater than quantity demanded at a price; a surplus.
Price mechanism: The free interaction of demand and supply that allocates resources through prices.
Maximum price (price ceiling): A legal price above which a good may not be sold.
Minimum price (price floor): A legal price below which a good may not be sold.
Rationing: Sharing out a scarce good by a method other than price, such as coupons or quotas.
Black market: Illegal market where goods are sold above the controlled price.
Hoarding: Holding back goods from the market to sell later at higher prices.

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