Download The Free Market Price: EQUILIBRIUM Ch. 6

The Free Market Price:
EQUILIBRIUM
Ch. 6, Sect. 1-3
What does it mean when the “price is right”?
How does a free market determine
equilibrium prices?
How do changes to demand and supply affect
the equilibrium price?
How a market works
• In a free market, demand and supply work
together to create prices
• This causes market equilibrium, where
the quantity demanded of a g/s equals the
quantity supplied of that g/s (Qd=Qs)
– Satisfaction of both consumers & producers—
“balance” of the market
When the “Price is Right”
• Have to find the right price at which
this happens in a market
(equilibrium price)
– Also called “market-clearing price”
because the market will be clear of
shortages and surpluses
• The quantity of g/s at equilibrium
is called the equilibrium quantity
– can be graphed using Qd/Qs
schedule
Graphing equilibrium
What is the equilibrium price?
What is the equilibrium quantity?
Quick check
• What is equilibrium?
• Why do consumers and producers care
about equilibrium?
• What happens if the market isn’t in
equilibrium (too much? too little?)
The Market Price
• Remember the “invisible hand”? When
consumers and producers willingly interact in
order to buy/sell g/s?
• This interaction will also push the market price,
or the price a willing consumer will pay to a
willing producer for a g/s, towards equilibrium
price
– Economists therefore say that the law of demand and
law of supply will always act together to reach
equilibrium
What Happens if the
Price Isn’t Right?
• If producers set a price above or below
equilibrium, it is known as disequilibrium
• The result can be a shortage: Qd > Qs at a
certain price
– this is also called excess demand—too many
customers for too few goods
– This means that the price is too low
• The result can be a surplus: Qd < Qs at a
certain price
– This is called excess supply—too many producers
for too few customers
– This means the price is too high
Graphing disequilibrium:
Excess demand (shortage)
What happens to demand when
the price is set $1.00 below
equilibrium?
Graphing disequilibrium:
Excess supply (surplus)
What happens to supply when
the price is set $1.00 above
equilibrium?
Quick check
• What does it mean if there is disequilibrium?
• What does excess supply mean for the price of
a good?
• What does excess demand mean for the price
of a good?
• How long do you think it would take for a market
to reach equilibrium?