The Market mechanism Characteristics of the equilibrium or market clearing price Q D Q O No shortage o No excess supply o No pressure on the price to change Chapter 2: The Basics of Supply and Demand Slide 21
Chapter 2: The Basics of Supply and Demand Slide 21 The Market Mechanism ◼ Characteristics of the equilibrium or market clearing price: ⚫ QD = QS ⚫ No shortage ⚫ No excess supply ⚫ No pressure on the price to change
The Market mechanism Price (s per unit) Surplus If price is above equilibrium 1)Price is above the market clearing price d 3)Price falls to the market-clearing price Quantity Chapter 2: The Basics of Supply and Demand Slide 22
Chapter 2: The Basics of Supply and Demand Slide 22 The Market Mechanism Quantity D S P0 Q0 If price is above equilibrium: 1) Price is above the market clearing price 2) Qs > Qd 3) Price falls to the market-clearing price P1 Surplus Price ($ per unit)
The Market mechanism A Surplus a The market price is above equilibrium o There is excess supply o Producers lower prices o Quantity demanded increases and quantity supplied decreases o The market continues to adjust until the equilibrium price is reached Chapter 2: The Basics of Supply and Demand Slide 23
Chapter 2: The Basics of Supply and Demand Slide 23 The Market Mechanism ◼ The market price is above equilibrium ⚫ There is excess supply ⚫ Producers lower prices ⚫ Quantity demanded increases and quantity supplied decreases ⚫ The market continues to adjust until the equilibrium price is reached. A Surplus
The Market mechanism Price (s per unit) Surplus Assume the price is P1, then: 1)Qs: Q1>Qd: Q2 2)Excess supply is Q1: Q2. 3 Producers lower price. 4)Quantity supplied decreases and quantity demanded Increases 5)Equilibrium at P2Q3 Q Q2 quantity Chapter 2: The Basics of Supply and Demand Slide 24
Chapter 2: The Basics of Supply and Demand Slide 24 The Market Mechanism D S Q1 Assume the price is P1 , then: 1) Qs : Q1 > Qd : Q2 2) Excess supply is Q1 :Q2 . 3) Producers lower price. 4) Quantity supplied decreases and quantity demanded increases. 5) Equilibrium at P2Q3 P1 Surplus Q2 Quantity Price ($ per unit) P2 Q3
The Market mechanism Surplus-Review a The market price is above equilibrium o There is excess supply o Producers lower prices o Quantity demanded increases and quantity supplied decreases o The market continues to adjust until the equilibrium price is reached Chapter 2: The Basics of Supply and Demand Slide 25
Chapter 2: The Basics of Supply and Demand Slide 25 The Market Mechanism ◼ The market price is above equilibrium: ⚫ There is excess supply ⚫ Producers lower prices ⚫ Quantity demanded increases and quantity supplied decreases ⚫ The market continues to adjust until the equilibrium price is reached Surplus - Review: