Explain how market equilibrium is determined and discuss the role of the price mechanism.
How to lay out the answer. Follow the frame, then write it in your own words.
1 · Define equilibrium. The price at which quantity demanded equals quantity supplied, so the market clears.
2 · Draw the diagram. [Diagram: D and S crossing at E, with P* and Q*; a surplus band above P* and a shortage band below]
3 · Explain adjustment.
Above P*: surplus, sellers cut prices until Qd = Qs.
Below P*: shortage, buyers bid up prices until Qd = Qs.
4 · Show a numerical case. Qd = 6,000 − 20P, Qs = 30P − 1,500 gives P = Rs. 150, Q = 3,000.
5 · Effects of shifts. Demand shifts move P and Q in the same direction; supply shifts move them in opposite directions.
6 · Role of the price mechanism. Signals, rations and gives incentives, allocating resources without central planning. Note its limits: public goods, externalities, inequality.
7 · Sri Lankan business link. Festival-season price rises for rice and oil signal traders to stock more.
8 · Conclude. Equilibrium is stable because surpluses and shortages correct themselves through price changes.
Scoring tip: Show the arithmetic in full, including the check with the supply equation. Examiners give method marks.
