Overview
This lecture explains how prices are determined in a market economy through the interaction of demand and supply, introducing the concept of market equilibrium.
Market Equilibrium
- Demand curve slopes downward; supply curve slopes upward.
- The intersection of demand and supply curves is called the equilibrium point or market clearing point.
- At equilibrium, the price is where quantity demanded equals quantity supplied (e.g., $3 and 15 units in the example).
- Equilibrium means neither buyers nor sellers have incentive to change their behavior.
Surpluses and Shortages
- If price is above equilibrium (e.g., $5), quantity supplied exceeds quantity demanded, causing a surplus.
- Sellers respond to surplus by lowering prices.
- If price is below equilibrium (e.g., $1), quantity demanded exceeds quantity supplied, causing a shortage.
- Buyers respond to shortage by bidding up prices.
- Market forces push prices toward equilibrium.
Determinants of Price
- Prices result from the interaction of both supply (sellers) and demand (buyers).
- Prices are not set by sellers alone; both buyers and sellers influence market price.
- High prices can result from high demand, high supply costs, or both.
- Complaints about high prices often ignore the role of demand as well as supply.
Key Terms & Definitions
- Equilibrium — The point where quantity demanded equals quantity supplied; market clearing price and quantity.
- Surplus — When quantity supplied exceeds quantity demanded at a given price.
- Shortage — When quantity demanded exceeds quantity supplied at a given price.
- Market Clearing Price — The price at which the amount supplied is equal to the amount demanded.
Action Items / Next Steps
- Review the concepts of demand, supply, and equilibrium for upcoming assessments.
- Prepare examples of surplus and shortage scenarios for class discussion.