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Bryant Economics MARKET EQUILIBRIUM PRICE NOTES Determining Prices in a Free Market System Assuming that competition exists, prices are determined in a __________ ___________ through the interaction of _____________ (those who are willing and able to purchase goods) and ______________ (those who are willing and able to produce goods or make them available for sale). This means that without government intervention, the “______________ _______” of the marketplace coordinates the quantities that consumers are willing able to purchase (________) and that producers are willing and able to provide for sale (___________) at various price at a particular point in time. When the market matches up the two sides (_______ and _______) of the market, a ________ ______ is determined. The market price is the price at which all that is __________ is _________. Equilibrium in the Marketplace P S 3 2 D 1 5 10 15 Q The Pe = ______ Qe = _______ At the market price what is the relationship of QS_____QD Because this relationship exists, the market is said to be in ___________ at the market price. Therefore, the market price is also called the _________________ price (Pe) and the quantity at the market price is called the ________________ quantity or Qe. The market price and quantity price (Pe and Qe) are found only at the _________________ of the supply and demand curves. Disequilibrium in the Marketplace P If the seller or sellers decide to raise the price of the good above the market price (Pe) from $2 to $3, then ___ P above Pe ___QD ____QS ____S ____D S 3 2 At the new higher price: QD ____ QS D 1 5 10 15 Q Therefore, _________________ 1 The market is in disequilibrium (out of balance) because a ___________ exists. When this occurs, sellers will ___P, then QD ___ and QS____ until QD___QS. Because of the law of __________ and __________, the market always seeks equilibrium. In this case P will ___ until Pe is reached. QS___QD= the size or amount of the _________ = ____. P If the seller or sellers decide to lower the price of the good above the market price (Pe) from $2 to $1, then P ___ Pe ___QD ____QS ____S ____D S 3 2 At the new lower price: QD ____ QS Therefore, _________________. The market is in disequilibrium (out of balance) because a ___________ exists. When this occurs, sellers will D 1 5 10 15 Q ___ P and then QD ___ and QS___ until QD __ QS. Because of the law of _________ and _________, the market always seeks equilibrium. In this case P will ___ until ___ is reached. QD __ QS= size or amount of the __________ = ___. How the market price is changed If a seller raises or lowers his/her price above or below the market price equilibrium (Pe), the result will be a ___________ or ___________. This is because the change in price simply causes movement along the demand and supply curves. The movement changes only the ____ and the _____, thus causing QD and QS to no longer be in balance. For the market price to change, there must be a new intersection of supply and demand; thus, the market price changes only if there has been a change in _______ or ________ resulting from a change in _____________ _________________. Such changes will cause ________ in the supply and demand curves, resulting in a new intersection and therefore, a new __ and __. Effects of changes in supply and demand on the market price Increase in demand Decrease in demand P ___ D ___Pe ____ Qe Increase in supply P ___ D ___Pe ____ Qe P Q ___ S ___Pe ____ Qe Decrease in Supply P Q ___ S ___Pe ____ Qe Q Q Government interventions in the market place Sometimes government intervenes in the operation of the ______ ________ because demands have been made on the government to do something about prices that are “_____ ______” or “______ ______.” The government takes action in these instances to place legal barriers on the market place that will not allow ______ to fall below certain price or to _____ above a certain price. These legal barriers are identified and defined below: _______________ a legal minimum price below which the price of a good is not allowed to fall. _______________ a legal maximum price above which the price of a good is not allowed to rise To be effective, a minimum price must be placed ______ the equilibrium price. Such a minimum price will create a ____________. To be effective, a maximum price must be placed _____ the equilibrium price. Such a maximum price will create a ____________. Effect of a price floor/support: P Effect of a price ceiling: P Q Q