1.2.6 - price determination

how many times does quantity demanded equal quantity supplied

ONCE (where the curves intersect)

what is the price at which demand = supply known as

market clearing price/equilibrium price

what happens if price is too high

excess supply compared to quantity demanded

how does the price too high situation rectify itself

1. stocks build up

2. firms cut prices

3. causes contraction in supply, and extension in demand

4. market reaches equilibrium and clears (demand = supply)

what happens if price is too low

excess demand for the supply available

how does the price too low situation rectify itself

1. not enough stock for customers who want it

2. customers bid up prices

3. causes contraction in supply and extension in demand

4. market reaches equilibrium and clears (demand = supply)

draw/picture a supply demand graph

.

what happens if there is an increase in demand (due to another factor)

shift in demand curve to the right

if the price remains as it was, there would be excess demand

then the excess demand process occurs, causing the market to reach a new equilibrium

what happens if there is a decrease in demand (due to another factor)

shift in demand curve to the left

if price remains as it was, there would be excess supply

then the excess supply process occurs, causing the market to reach a new equilibrium

what happens if there is an increase or decrease in supply

increase supply (shift right) = excess supply

decrease supply (shift left) = excess demand

relative processes occur to reach new equilibrium