MARKET EQUILIBRIUM PRICE NOTES DETERMINING PRICES IN A FREE MARKET SYSTEM

Assuming that competition exists, prices are determined in a market system through the interaction of buyers (those who are willing and able to purchase goods) and sellers (those who are willing and able to produce or sell goods).

This means that without government intervention, the “invisible hand” of the marketplace coordinates the quantities that consumers are willing and able to purchase (demand) and that producers are willing and able to sell (supply) at various prices at a particular point in time.

When the market matches up the two sides (supply and demand) of the market, a market price is determined. The market price is that price at which all that is supplied is demanded.

EQUILIBRIUM IN THE MARKETPLACE

DISEQUILIBRIUM IN THE MARKETPLACE

The market is in disequilibrium (out of balance) because a SURPLUS exists. When this occurs, sellers will ____ P, then QD ____ and QS _____ until QD ____ QS. Because of the laws of SUPPLY and DEMAND, the market always seeks equilibrium. In this case, P will ____ until Pe is reached. QS - QD = the size or amount of the SURPLUS which = 10 .

DISEQUILIBRIUM IN THE MARKETPLACE

HOW THE MARKET PRICE IS CHANGED

Effects of changes in supply and demand on the market price

GOVERNMENT INTERVENTIONS IN THE MARKET PLACE Sometimes government intervenes in the operation of the FREE MARKET because the people have asked the government to do something about prices that are “ TOO LOW” or “ TOO HIGH ”. The government takes action in these instances to place legal barriers on the market place that will not allow PRICE to fall below a certain price or to RISE above a certain price. These legal barriers are identified and defined below:   PRICE FLOOR : legal minimum price below which the price of a good may not fall. PRICE CEILING : legal maximum price above which the price may not rise.