The Free Market Price: EQUILIBRIUM Ch. 6, Sect. 1-3 What does it mean when the “price is right”?...
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Transcript of The Free Market Price: EQUILIBRIUM Ch. 6, Sect. 1-3 What does it mean when the “price is right”?...
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 ofshortages and surpluses
• The quantity of g/s at equilibriumis 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?