Determination Of Equilibrium & Market Prices Flashcards
1
Q
Equilibrium Price & Quantity
A
Equilibrium Price & Quantity: Where supply meets demand
- At market equilibrium, price has no tendency to change, known as market clearing price
2
Q
Excess Demand
A
- At Q2, price is at P2 which is below market equilibrium
- Demand is now greater than supply (Q3-Q2) This is disequilibrium. Demand price ≠ supply price, Qd ≠ Qs
- This is a shortage in the market, pushes prices up & causes firms to supply more. Since prices increase, demand will contract.
- Once supply meets demand again, price will reach the market clearing price, P1.
3
Q
Excess Supply
A
Excess Supply: When price is above P1
- Supply now at Q2 & demand at Q1
- Surplus of Q2- Q1. Price falls to P1 as firms lower prices & try to sell their goods. Market will clear & return to equilibrium
