MARKET-CLEARING PRICE What happens when buyers and sellers interact?

Market-Clearing Price Definition The price that balances the amount buyers want to buy with the amount sellers want to sell. <What was the market-clearing price for chips?

Surplus and Shortage Do we have equilibrium? Surplus is when producers want to sell more than consumers want to buy. <Is price above or below equilibrium? Shortage is when consumers want to buy more than producers want to sell.

Price ceilings/Price Floors Both prevent equilibrium!! Price ceiling is when restriction won't let the price rise to equilibrium (price is kept artificially low). <Is price above or below equilibrium? <Do we have a shortage or a surplus? Price floor is when restriction won't let the price fall to equilibrium (price is kept artificially high).

Functions of Price Rations Provides Incentives Provides Information

How do Prices ration? Buyers compete against buyers for possession of the good. <CD auction <Chips

Prices as Incentives Prices act as incentive to producers <Profit is the motivator Do other methods of rationing provide incentive to produce?

Price and Information Helps consumers compare cost of choices Tells producers about consumer preferences

Equilibrium or Market Clearing Price