1.2.6 - Price determination Flashcards
What is Market equilibrium?
Equilibrium is state of equity or balance between market demand or supply no excess demand or supply. Supply is equal to demand, so where the demand and supply curves cross. Known as market clearing products are supplied to market are cleared but no buyers are unable to buy the good.
What does Market Equilibrium look like?
QE and PE
What is Market Disequilibrium?
In Market disequilibrium there is excess demand or supply.
What does excess demand look like on a demand and supply diagram and what is the explanation for it?
If price is set below the equilibrium level then there is excess demand. At Price 2 suppliers supply QS but cannot meet consumers demand of QD. Meaning there is excess demand is shaded area.
Shortage in the market, firms can charge more for their goods and services for an extension in demand. Can charge P1 for Q1.
What does excess supply look like on a demand and supply diagram?
When price is set higher than the equilibrium level, there is excess supply. At Price P2 suppliers are willing to supply Qs but consumers only willing to demand QD, meaning there is excess supply in the shaded area.
As a result firms have unsold goods. Encourage them to put on sales and lower prices to sell excess goods causing prices to fall and supply to contract to P1 demand will extend.
How is a extension in demand shown?
Increase in demand from D1 to D2 leads to an increase in price from P1 to P2 and an increase in output
How is an extension in supply shown?
An increase in supply from S1crease output from Q1 to Q2 and decrease price from P1 to P2
