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Price Market-clearing Price (Equilibrium Price) balances the amount buyers want to buy with amount sellers want to sell At the market-clearing price, the quantity demanded and the quantity supplied will be equal S Pe P D Q Qe Shortage A shortage occurs when buyers want to buy more than sellers want to sell QD > QS This will occur when price is below the market-clearing price S Pe P Shortage D Q Qe Surplus A surplus occurs when sellers want to sell more than buyers want to buy QS > QD This will occur when price is above market-clearing Surplus S Pe P D Q Qe Competition Competition among buyers pushes prices up to the market-clearing price – as in an auction Competition among sellers pushes price down to market-clearing as they vie for customers Roles of market-clearing price Rations existing supplies which are too scarce to meet wants. Enables people to choose who gets the goods and services Provides incentives to produce, including what and how much to produce as well as how to produce them Demands and supplies are constantly changing This causes price to rise and fall. For example, an increase in demand will cause price to rise S P2 Pe P D D2 Q Qe These higher and lower prices cause businesses to expand and contract Remember, suppliers react to price. If prices increase, they will produce more – expanding the economy. If prices drop, they will produce less – contracting the economy Vital Information Provided Reveals to businesses the kinds and quantities of things consumers want produced Reveals to consumers the cost of producing various goods and services Both use this information when deciding what and how much to produce and consume