Markets, Equilibrium, & Prices

Objectives:

Analyze the relationship between quantity demanded and quantity supplied in determining prices in a market economy.

Create a demand and supply schedule and graph a demand and supply curve to determine an equilibrium price.

Explain the causes and effects of shortages, surpluses, and government enforced price controls.

Analyze and graph the change in equilibrium quantity as events affect demand and supply.

In a perfectly competitive market, demand and supply work together to determine prices.

Direct and indirect communication between consumers and producers drives prices to a market equilibrium point at which the quantity demanded and quantity supplied are equal. On a graph, the equilibrium point is the point of intersection of the demand and supply curves.

Equilibrium price can also be described as the market-clearing price, or the “right” price. At this, both consumers and producers are satisfied.

When prices are set above or below the equilibrium price, disequilibrium occurs: quantity demanded no longer equals quantity supplied. Equilibrium quantity, as determined by the market equilibrium point, is disrupted.

When prices are too low, excess demand leads to shortages. When prices are too high, excess supply leads to surpluses. Adjusting prices can restore equilibrium.

To analyze how an event will affect market equilibrium, ask yourself these questions:

Prices give markets flexibility to respond to changing conditions.

Prices guide scarce resources to their most efficient uses.

Because of political pressure, governments sometimes implement price controls when prices are considered unfairly high for consumers or unfairly low for producers.

Shortages may result in government -imposed rationing, the controlled distribution of a limited supply of a good or service. Or they may create black markets, in which goods are traded at prices or in quantities higher than allowed by the law.