Intro to Market Equilibrium

Also referred to as Market Clearing Price Quantity supplied = Quantity Demanded This price “clears” the market

◦ There is neither a surplus nor a shortage

Market Equilibrium

Does the Market Clearing Price leave everyone in the market satisfied?◦ NO: Everyone who wants to buy goods at

lower prices are not satisfied Any producer who wants to sell at

higher prices are not satisfied

When buyers are left out of the market = SHORTAGE◦ Quantity demanded > Quantity supplied◦ The shortage is = to the difference between

quantity supplied and quantity demanded◦ Price is BELOW market clearing price

Once a shortage exists in the market, it will begin moving towards equilibrium◦ HOW?

Buyers begin competing for the amount available1) Buyers willing to pay more for goods2) Many buyers will reduce the amount they

want to consume as price slowly increases3) Producers will begin putting more quantity

on the market as the price increases

When sellers want to sell more than buyers want to buy = SURPLUS◦ Quantity supplied > Quantity demanded◦ The shortage is = to the difference between

quantity supplied and quantity demanded◦ Price is ABOVE the market clearing price

Once a surplus exists in the market, it will begin moving towards equilibrium1) Sellers begin competing with one another for

customers and decrease their prices2) At these lower prices, some sellers will begin

decreasing the quantity supplied3) Once the sellers begin slowly lowering prices,

more buyers begin entering the market

In economics, a surplus simply means people don’t want to buy goods at a certain price

The question deals with a difference between WANTS and DEMANDS◦ Demands are wants that can be backed up with

the ability to pay for goods

Can their be a surplus of scarce goods?

A Lady Gaga concert will take place in 6 months. Tickets are $120 per person. The concert has been sold out for a month, and people have now begun searching for tickets on Craigslist. Some of these tickets are now selling for $500.

Surplus, Shortage, or Equilibrium?

The Sabres are selling tickets for $50 per seat, per game. You can buy a ticket the day of the game without waiting in line. Of the 18,690 seats in the arena, only 10,000 people are attending the game.

Surplus, Shortage, or Equilibrium?

Loganberry has been selling at $3 per 6-pack for the past 8 months at Wegmans. You can buy a 6-pack any time you enter Wegmans, and Wegmans never runs out before the next shipment from the supplier.

Surplus, Shortage, or Equilibrium?

Prices send SIGNALS (information)◦ When prices are high

Sellers take the signal as the OK to produce more

Buyers will purchase less-- When prices are low

Sellers will produce less Buyers will increase

purchases

What are the functions of price in a market system?

• Prices Ration– Ration scarce goods among people who want more

goods than are available–Whoever is willing and able to pay the market price

What are the functions of price in a market system?

Prices Motivate◦ Provide incentives for people to produce goods

and services◦ Help decide what to produce and how produce

What are the functions of price in a market system?

Because the supply or demand for a product can change, each market clearing price is likely to rise or fall over time

Changes in Prices and Production

Chapter 5 NOTESMarket-Clearing Price

Chapter 3—Market demand shows that consumers buy less if prices go up.

Chapter 4—Market supply shows that producers produce more if prices go up.

Demand and Supply

Market Clearing Price—is the price that balances the amount buyers want to buy with the amount sellers want to sell.

This price is also called the market equilibrium.

It is the point where the supply curve and the demand curve intersect.

Market Clearing Price

Copy chart 5-1 on page 38 into your notebook.

Activity

Shortage—How much more of a product buyers want to buy than sellers want to sell at a given price.

To calculate shortage, subtract the number that buyers demand at a particular price by the number producers are willing to produce at that price.

Copy Chart 5-2 into your notebook

Shortage

How much more of a product sellers want to sell than buyers want to buy at a given price.

To calculate surplus, subtract the number of goods a producer is willing to sell at a particular price by the number of goods consumers want to buy at that same price.

Copy Graph 5-3 into your notebook.

Surplus

Rationing—Distributing or allocating a product.

In a free-market economy, goods are rationed through market prices.

Prices that Ration

Besides rationing, market prices also provide incentives for people to produce goods and services.

Prices that Motivate

Look at chart 5-6 in your text book (p.42)

In your groups, come up with two reasons why you think the “Fortune 500” companies have changed over the last 50 years.

Changes in Price and Production