Equilibrium Price Flashcards
1
Q
describe how the interaction between supply and demand determines equilibrium price.
A
equilibrium price is the price at which demand is equal to supply
- at this price, all products will be sold
- all buyers can purchase everything they want
- all sellers can supply everything they want
- the market has cleared: nothing is left to buy or sell
2
Q
describe why excess demand and excess supply can lead to changes in price.
A
excess demand occurs when demand is greater than supply
- this means that firms can raise their prices in order to improve profitability
- alternatively, they could increase supply and leave price the same
- this is good for the firm but bad for the consumer
excess supply occurs when supply is greater than demand
- this means that firms will have to lower their prices in order to sell their products
- alternatively, they could reduce supply and leave price the same
- this is bad for the firm but good for the consumer
