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Market Clearing Price Market Clearing Price Presentation Transcript

  • Economics, Chapter Five Market Clearing Price (Balance in the Market)
  • Market-Clearing Price (MCP)/ Equilibrium Price (e)
    • The price @ which sellers want to sell & buyers want to buy.
      • -Supply = Demand
      • Market “clears”
    $30 s $25 $20 $15 MCP $10 $5 d $0 1 2 3 4 5 6 7
  • When Supply ≠ Demand
    • Shortage : P < MCP
    • amt. supplied is less than amt. demanded
      • Buyers compete to consume
      • Buyers are willing to pay more $
          •  Results of Shortages:
            • Buyers reduce amount of goods & svcs they want
            • Producers work to increase the amount they produce
            • As long as price is less than market-clearing price, buyers increase demand
      • Eventually market-clearing will be re-established
  • When Supply ≠ Demand
    • Surplus: P > MCP. Sellers want to sell more than consumers will buy
      • Results of surplus:
          • Sellers begin to compete more for consumers
          • SALE: offer goods & svcs @ lower prices
          • Price begins to fall, demand increases
          • Sellers reduce the amount they want to sell as price falls
    • Market-Clearing then is reached as demand = supply again
  • Role of Prices
    • Send Signals
      • Info. to both buyers and sellers
    • Ration
      • Determine who will get good or svc.
      • Auctions, as well as decisions whether or not to buy
    • Motivate
      • Can get Buyers to Demand, or Producers to Supply
      • No $ in it, not worth supplying!
  • Changes in Price & Production
    • S & D can go  & 
    • As S & D changes , so does MCP!
      • If S  faster than D,  in MCP
      • If D  faster than S,  in MCP
      • If S  at same rate as D, no change in MCP
  • Changes in Price & Production (cont’d)
    • Taco Market (supply  )
      • Floods have killed 1/2 of the nation's cattle (less beef). How will this effect the taco market in the state?
        • 
    • $3 MCP2
    • P
    • R $2 MCP1
    • I
    • C $1
    • E
    • 0 1 2 3 4 5 6
          • # TACOS
  • Changes in Price & Production (cont’d)
    • Demand  can also cause a  in Market-Clearing Price. What happens if all of a sudden medical research shows that eating tacos makes you smart:
        • 
    • $3
    • P
    • R $2
    • I
    • C $1
    • E
    • 0 1 2 3 4 5 6
          • # TACOS
  • Reasons for M.C.P. 
    •  in technology: tech.  in supply & M.C.P. (how?)
    •  in consumer taste: consumers want of product  in demand & M.C.P. (how?)
    •  weather: bad weather destroying crops  in supply & M.C.P. (how?)
  • Price Quantity Demand Supply Market Clearing or Equilibrium Price P 1 P 2
  • Price Quantity Demand Supply Market Clearing or Equilibrium Price P 1 Q 1 P 2 Q S Q D Shortage
  • Price Quantity Demand Supply Market Clearing or Equilibrium Price P 1 Q 1 P 2 Q S Q D Shortage
  • Price Quantity Demand Supply Market Clearing or Equilibrium Price P 1 Q 1 P 2 Q S Q D Surplus