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Chapter 6, Section 2 – How Prices are Determined

Chapter 6, Section 2 – How Prices are Determined. The Adjustment Process Market Equilibrium / Equilibrium Price Surplus Shortage. Price Adjustment – Market Equilibrium. Market Equilibrium Exists When… Prices are stable (not changing a lot) Quantity Demanded = Quantity Supplied

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Chapter 6, Section 2 – How Prices are Determined

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  1. Chapter 6, Section 2 – How Prices are Determined • The Adjustment Process • Market Equilibrium / Equilibrium Price • Surplus • Shortage

  2. Price Adjustment – Market Equilibrium • Market Equilibrium Exists When… • Prices are stable (not changing a lot) • Quantity Demanded = Quantity Supplied • The Market is CLEARED of the good or service • At what quantity is the market cleared?

  3. Econ Model for SUPPLY and DEMAND

  4. Price Adjustment – Equilibrium Price At Market Equilibrium, supply meets demand for the product The Market is CLEARED of the good or service The Price at which supply meets demand is the Equilibrium Price It is also called the Market Clearing Price

  5. Econ Model for SUPPLY and DEMAND

  6. Price Adjustment – Surplus Sometimes Supply is GREATER than Demand This is called a SURPLUS There is extra product that consumers are not buying At what price(s) does a surplus exist? Why might a surplus exist? Example?

  7. Econ Model for SUPPLY and DEMAND

  8. Price Adjustment – Shortage Sometimes Demand is GREATER than Supply This is called a SHORTAGE There is not enough of a product that consumers want to buy At what price(s) does a shortage exist? Why might a shortage exist? Example?

  9. Econ Model for SUPPLY and DEMAND

  10. Review of Demand and Supply Graphs

  11. MARKET EQUILIBRIUM – P*

  12. At P1, which is greater: supply or demand?

  13. At P1, which is greater: supply or demand?

  14. A Touch of Realism Market Equilibrium rarely exists in Market Systems Buyers and Sellers come close on price with respect to some products – gas, clothes, pizza More often, prices change over time to accommodate buyer and seller understanding of the good or service, coming close to market equilibrium Some Stores use LOSS LEADERS as a way to promote a sale – an item priced below cost to attract customers EXAMPLE: the Walmart Opening Price Point

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