1.2.6: Price Determination Flashcards
What is equilibrium price also known as?
The market clearing price.
What is equilibrium price?
The unique point where supply is equal to demand.
In what situation would the equilibrium price and quantity change?
If there was a change in the conditions of supply and/or demand.
What is this a graph of?
Excess demand.
What is this a graph of?
Excess supply.
What does excess demand mean in terms of equilibrium?
Price is below equilibrium; there is more demand for a good than there is supply.
What does excess supply mean in terms of equilibrium?
Price is higher than equilibrium; there is more supply for a good than there is demand.
How do firms react to excess demand?
There is a shortage in the market.
Firms will charge higher prices, leading to a contraction in demand.
How do firms react to excess supply?
Firms have unsold goods.
They will sell excess goods on sale, leading to an extension of demand.
