2.5 The determination of equilibrium market prices

0.0(0)
studied byStudied by 0 people
learnLearn
examPractice Test
spaced repetitionSpaced Repetition
heart puzzleMatch
flashcardsFlashcards
Card Sorting

1/3

encourage image

There's no tags or description

Looks like no tags are added yet.

Study Analytics
Name
Mastery
Learn
Test
Matching
Spaced

No study sessions yet.

4 Terms

1
New cards

Equilibrium price and quantity

  • This is when supply meets demand. On the diagram, this is shown by P1 and Q1.

  • At market equilibrium, price has no tendency to change, and it is known as the market clearing price.

<ul><li><p>This is when supply meets demand. On the diagram, this is shown by P1 and Q1. </p></li><li><p>At market equilibrium, price has no tendency to change, and it is known as the <mark data-color="#NaNNaNNaN" style="background-color: #NaNNaNNaN; color: inherit">market clearing price</mark>. </p></li></ul><p></p>
2
New cards

Excess Demand

  • At Q2, price is at P2 which is below market equilibrium. Demand is now greater than supply, which can be calculated by Q3-Q2. This is of disequilibrium. The demand price does not equal the supply price, and the quantity demanded does not equal the quantity supplied.

  • This is a shortage in the market. This pushes prices up and causes firms to supply more. Since prices increase, demand will contract.

  • Once supply meets demand again, price will reach the market cleaning price, P1

<ul><li><p>At Q2, price is at P2 which is below market equilibrium. Demand is now greater than supply, which can be calculated by Q3-Q2. This is of <mark data-color="#NaNNaNNaN" style="background-color: #NaNNaNNaN; color: inherit">disequilibrium</mark>. The demand price does not equal the supply price, and the quantity demanded does not equal the quantity supplied. </p></li><li><p>This is a <mark data-color="#NaNNaNNaN" style="background-color: #NaNNaNNaN; color: inherit">shortage</mark> in the market. This pushes prices up and causes firms to supply more. Since prices increase, demand will contract. </p></li><li><p>Once supply meets demand again, price will reach the market cleaning price, P1</p></li></ul><p></p>
3
New cards

Excess Supply

  • This is when price is above P1

  • Supply is now at Q2 and demand is at Q1. There is a surplus of Q2-Q1. Price will fall back to P1 as firms lower their prices and try to sell their goods. The market will clear and return to equilibrium.

<ul><li><p>This is when price is above P1 </p></li><li><p>Supply is now at Q2 and demand is at Q1. There is a <mark data-color="#NaNNaNNaN" style="background-color: #NaNNaNNaN; color: inherit">surplus </mark>of Q2-Q1. Price will fall back to P1 as firms lower their prices and try to sell their goods. The market will clear and return to equilibrium. </p></li></ul><p></p>
4
New cards

New Market Equilibrium

  • When the demand or supply curve shift due to the PIRATES or PINTSWC reasons, new market equilibriums are established.

  • For example, if there was an increase in the size of the population, demand would shift from D1 to D2.

  • Price would increase to P2 and suppliers would supply a larger quantity of Q2. A new market equilibrium is established at P2 Q2.

<ul><li><p>When the demand or supply curve shift due to the PIRATES or PINTSWC reasons, new market equilibriums are established. </p></li><li><p>For example, if there was an increase in the size of the population, demand would shift from D1 to D2. </p></li><li><p>Price would increase to P2 and suppliers would supply a larger quantity of Q2. A new market equilibrium is established at P2 Q2. </p></li></ul><p></p>