Transcript Price - ghseconomics

Price
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Market-clearing Price (Equilibrium Price)
balances the amount buyers want to buy
with amount sellers want to sell
At the market-clearing price, the quantity
demanded and the quantity supplied will
be equal
S
Pe
P
D
Q
Qe
Shortage
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A shortage occurs when buyers want to
buy more than sellers want to sell
QD > QS
This will occur when price is below the
market-clearing price
S
Pe
P
Shortage
D
Q
Qe
Surplus
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A surplus occurs when sellers want to sell
more than buyers want to buy
QS > QD
This will occur when price is above
market-clearing
Surplus
S
Pe
P
D
Q
Qe
Competition
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Competition among buyers pushes prices
up to the market-clearing price – as in an
auction
Competition among sellers pushes price
down to market-clearing as they vie for
customers
Roles of market-clearing price
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Rations existing supplies which are too
scarce to meet wants. Enables people to
choose who gets the goods and services
Provides incentives to produce, including
what and how much to produce as well as
how to produce them
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Demands and supplies are constantly
changing
This causes price to rise and fall. For
example, an increase in demand will cause
price to rise
S
P2
Pe
P
D
D2
Q
Qe
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These higher and lower prices cause
businesses to expand and contract
Remember, suppliers react to price. If
prices increase, they will produce more –
expanding the economy. If prices drop,
they will produce less – contracting the
economy
Vital Information Provided
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Reveals to businesses the kinds and
quantities of things consumers want
produced
Reveals to consumers the cost of
producing various goods and services
Both use this information when deciding
what and how much to produce and
consume