price determination

Market

A place/situation where buyers and sellers are in contact to exchange goods, services and factors of production

Types of markets

1. Financial market

2. Factor market

3. Product market

They are lol determined by supply and demand

Product market

Where final goods and services are bought and sold. Firms supply the goods and services while consumers buy them

Factor market

Where factors of production are sold and bought. Households supply the factors while firms buy these factors

Financial market

Where liquid assets(an asset that can be easily traded into cash) are traded. Owners of assets supply while buyers buy the assests

Price determination

Determined by the interaction/intersection between both supply and demand

Market equilibrium

• Interaction of demand and supply determines the market equilibrium price and output

• Refers to a situation where quantity of goods that consumers are idling and able to buy exactly balance the quantity the sellers are willing and able to sell

• QUANTITY DEMANDED=QUANTITY SUPPLIED

• No shortage or surplus

• No tendency for price or quantity to change

Equilibrium

Intersection point

How does market equilibrium change

Due to factors affected demand curve and supply curve to shift (non price)

Factors affecting demand curve to shift (non price)

1. Price of complements

2. Price of substitutes

3. Income changes

4. Taste and preferences

5. Population

Factors causing supply curve to move (non price)

1. Size of industry

2. Price of related goods (joint competitive supply)

3. Indirect tax subsidies (grants/direct tax)

4. Cost of production

Equilibrium price

Market clearing price

Market price

Market clearing price

Market disequilibrium

• quantity demanded does not equal to quantity supplied . There is either a shortage or surplus of goods and there’s tendency for market or equilibrium price / quantity to change

• Unstable prices

• QUANTITY DEMANDED DOES NOT EQUAL TO QUANTITY SUPPLIED

Surplus

Excess supply

Quantity supplied>quantity demanded

Price decrease

• As the price is above (price)equilibrium, there is a surplus , a downward pressure will be exerted on the price causing it to be unstable above the (price)equilibrium

Shortage

Excess demand

QUANTITY DEMANDED>QUANTITY SUPPLIED

Price increase

• At a price below the (price) equilibrium, there is an upward pressure on the price as there is a shortage, so it is unstable below the point

When market is below the equilibrium price

• there is a shortage

• Excess demand

• Sellers respond by charging higher prices(consumers compete for limited stock), upward pressure acting on the price

• Due to the increase in price, goods are less affordable for consumers but more profitable for firms to produce

• A fall in quantity supplied will cause price to rise until the market reaches equilibrium

When market price is above the equilibrium price

• quantity supplied>quantity demanded

• There is a surplus

• To remove excess stock, firms will lower prices to encourage more consumers to buy

• There is a downward pressure on the price (cheaper), goods are more affordable for consumers but less profitable for firms to produce

• Price will continue to fall until the market reaches equilibrium