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McKee/Wells Name: 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