1.2.3 Markets

What is a market?

A market is any place that brings buyers and sellers together to trade at an agreed price

How do buyers agree on the price?

Buyers agree on the price by purchasing the good/service, if they do not agree on the price, then they do not purchase the good/service.

How is the equilibrium price determined?

Prices adjust though buyer-seller interactions until an equilibrium is reached, where sellers are happy with sales and buyers feel the product is worth the price.

What is equilibrium?

A position where demand equals supply (there are no shortages and no surpluses).

What would happen if the price was set above the equilibrium?

Supply would be greater than demand, and there would be a surplus

What would happen if the price was set below the equilibrium?

Demond would be greater than supply, and there would be a shortage

What happens when demand rises?

Demand curve shifts to the right

• At original price there is a shortage

• Price rises

• New equilibrium at higher price and higher quantity

What happens when demand falls?

Demand curve shifts left

• At original price, there is a surplus

• Price falls

• New equilibrium at lower price and lower quantity

What happens when supply rises?

Supply curve shifts right

• At original price, there is a surplus

• Price falls

• New equilibrium at lower price and higher quantity

What happens when supply falls?

Supply curve shifts left

• At original price, there is a shortage

• Price rises

• New equilibrium at higher price and lower quantity

What happens if the price is set too high?

Disequilibrium occurs (demand and supply are not equal)

• Manufacturers reduce price to clear surplus

• Causes contradiction of supply and extension of demand

What happens if the price is set too low?

Disequilibrium occurs (demand and supply are not equal)

• Manufacturers increase price to maximise profits

• Causes extension of supply and contradiction of demand

What is contradiction of demand?

An upwards movement along the demand curve (a reduction in quantity demanded in response to an increase in price of a product)

What is extension of demand?

A downwards movement along the demand curve (an increase in quantity demanded in response to a decrease in price of a product)