The Market mechanism Price (s per unit) Assume the price is P2, then 1)Qd: Q2>Qs: Q1 2) Shortage is Q1: Q2 3)Producers raise price 4Quantity supplied increases and quantity demanded decreases eQuilibrium at P3, Q3 Shortage Q Q3 Q2 Quantity Chapter 2: The Basics of Supply and Demand Slide 26
Chapter 2: The Basics of Supply and Demand Slide 26 The Market Mechanism D S Q1 Q2 P2 Shortage Quantity Price ($ per unit) Assume the price is P2 , then: 1) Qd : Q2 > Qs : Q1 2) Shortage is Q1 :Q2 . 3) Producers raise price. 4) Quantity supplied increases and quantity demanded decreases. 5) Equilibrium at P3 , Q3 Q3 P3
The Market mechanism Shortage a The market price is below equilibrium ● There is a shortage o Producers raise prices o Quantity demanded decreases and quantity supplied increases o The market continues to adjust until the new equilibrium price is reached Chapter 2: The Basics of Supply and Demand Slide 27
Chapter 2: The Basics of Supply and Demand Slide 27 The Market Mechanism ◼ The market price is below equilibrium: ⚫ There is a shortage ⚫ Producers raise prices ⚫ Quantity demanded decreases and quantity supplied increases ⚫ The market continues to adjust until the new equilibrium price is reached. Shortage
The Market mechanism a Market Mechanism Summary 1)Supply and demand interact to determine the market-clearing price 2)When not in equilibrium, the market will adjust to alleviate a shortage or surplus and return the market to equilibrium 3)Markets must be competitive for the mechanism to be efficient Chapter 2: The Basics of Supply and Demand Slide 28
Chapter 2: The Basics of Supply and Demand Slide 28 The Market Mechanism ◼ Market Mechanism Summary 1) Supply and demand interact to determine the market-clearing price. 2) When not in equilibrium, the market will adjust to alleviate a shortage or surplus and return the market to equilibrium. 3) Markets must be competitive for the mechanism to be efficient
Changes In Market equilibrium a Equilibrium prices are determined by the relative level of supply and demand a Supply and demand are determined by particular values of supply and demand determining variables a Changes in any one or combination of these variables can cause a change in the equilibrium price and/or quantity Chapter 2: The Basics of Supply and Demand Slide 29
Chapter 2: The Basics of Supply and Demand Slide 29 Changes In Market Equilibrium ◼ Equilibrium prices are determined by the relative level of supply and demand. ◼ Supply and demand are determined by particular values of supply and demand determining variables. ◼ Changes in any one or combination of these variables can cause a change in the equilibrium price and/or quantity
Changes In Market equilibrium ■ Raw material prices p sS ● s shifts to s o Surplus a P, of Q, Q o Equilibrium P3 Q Q, Q3Q2 Q Chapter 2: The Basics of Supply and Demand Slide 30
Chapter 2: The Basics of Supply and Demand Slide 30 S’ Q2 ◼ Raw material prices fall ⚫ S shifts to S’ ⚫ Surplus @ P1 of Q1 , Q2 ⚫ Equilibrium @ P3 , Q3 P Q D S P3 Q1 Q3 P1 Changes In Market Equilibrium