Download MARKET EQUILIBRIUM PRICE NOTES 2

McKee/Wells
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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 or sell goods).
This means that without government intervention, the “_________________ _______” of the
marketplace coordinates the quantities that consumers are willing and able to purchase
(____________) and that producers are willing and able to sell (_________________) at
various prices 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 that price at which all
that is _________________ is _____________________.
Equilibrium in the
Marketplace
P
The Pe = __________ The Qe = ___________
At the market price, what is the relationship of
QS____________QD?
S
3
Because this relationship exists, the market is said to
be in _____________ at the market price.
2
1
D
5
10
15
Q
Therefore, the market price is also called the
____________________ price (Pe) and the quantity
at the market price is called the
_____________________ quantity (Qe).
The market price and quantity (Pe and Qe) are found
ONLY at the _________________ of the supply and
demand curves.
Disequilibrium in the
Marketplace
P
If the seller(s) decide to raise the price of the good
above the market price (Pe) from $2 to $3,
S
3
___P above Pe: ___ QD ___ QS ____S ____D
2
1
D
5
10
15
Q
At the new higher price: QD ___ QS
Therefore, ______________ exists.
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
laws of __________ and __________, the market always seeks equilibrium. In this case,
P will ____ until Pe is reached. QS ____ QD = the size or amount of the _____________
which = _____.
Disequilibrium in the
Marketplace
P
If the seller(s) decide to lower the price of the good
below the market price (Pe) from $2 to $1,
S
3
__P below Pe: ____QD ____QS ____S ____D
2
1
D
5
10
15
Q
At the new lower price: QD ___QS
Therefore, ____________________ exists.
The market is in disequilibrium (out of balance) because a ______________ exists. When this
occurs, sellers will ____ P and then QD ______ and QS _____ until QD ____ QS. In this
case, P will ____ until ___ is reached. QD____ QS = size or amount of the ____________
which = _______.
How the market price is changed
If the seller raises or lowers the price above/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. This 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 a ___________ in the supply and/or demand curves, resulting in a new
intersection and therefore, a new ______ and a new __________.
Effects of changes in supply and demand on the market price
Increase in Demand
Decrease in Demand
P
____D_____Pe_____Qe
S
D
Increase in Supply
P
____D_____Pe_____Qe
S
D
Decrease in Supply
P
S
____S_____Pe_____Qe
P
S
____S_____Pe_____Qe
D
D
Government interventions in the market place
Sometimes government intervenes in the operation of the ________ ___________ because
the people have asked 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 a certain price or to _____
above a certain price. These legal barriers are identified and defined below:
________ _____________: legal minimum price below which the price of a good may not fall.
________ _____________: legal maximum price above which the price may not rise.
Price Floor
To be effective, a minimum price must be
placed ________ the Pe (equilibrium price).
Price Ceiling
To be effective, a maximum price must be
placed ________ the Pe (equilibrium price).
Such a minimum price will create a
______________.
Such a maximum price will create a
______________.
Effect of a price floor/support:
Effect of a price ceiling:
P
S
P
D
S
D
Example:
Example:
What is the real world effect of this?
What is the real world effect of this?
Hint: To determine the amount of a shortage or a surplus, you need to find the DIFFERENCE
between QS and QD. To determine whether the imbalance is a shortage or a surplus – use
these formulas:
Equilibrium: QS = QD
or
QD = QS
Shortage:
QD > QS
or
QS < QD
Surplus:
QS > QD
or
QD < QS