Price and Equilibrium

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Economic Definitions

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Price and Equilibrium

  1. 1. Price and Equilibrium What are they and how are they determined?
  2. 2. Price is… <ul><li>… the monetary value placed on a good, and is generally determined by the interactions of the forces of Supply and Demand. </li></ul><ul><li>Producers want to maximize their profits while, at the same time, Consumers want to get the lowest prices. </li></ul><ul><li>By combining two concepts that we have already addressed, supply schedules and demand schedules, areas of commonality can be determined. </li></ul><ul><li>These areas, where the quantity of a good offered, and the quantity of a good demanded coincide, indicate what is known as a point of Equilibrium. </li></ul>
  3. 3. Equilibrium <ul><li>At this point on the combined schedules, the price asked by the Producer for each unit of good provided equals the price per unit of good that Consumers are willing to pay for the quantity of goods produced. </li></ul>
  4. 4. Disequilibrium <ul><ul><li>Supply and Demand are not always in equilibrium. </li></ul></ul><ul><ul><li>This can occur for a number of reasons and are referred to as situations of either: </li></ul></ul><ul><ul><ul><li>Excess Supply </li></ul></ul></ul><ul><ul><ul><li>or </li></ul></ul></ul><ul><ul><ul><li>Excess Demand </li></ul></ul></ul>
  5. 5. Excess Supply <ul><li>Excess Supply occurs when the Price of a good is higher than Consumers are willing to pay. </li></ul><ul><li>Therefore, the quantity of a good that Producers are willing to supply exceeds the quantity of the good demanded by Consumers. </li></ul><ul><li>To correct this, Producers will either have to cut-back on production or reduce prices. </li></ul>
  6. 6. Excess Demand <ul><li>Excess Demand occurs when the Price of a good is lower than what Producers are willing to sell a good for. </li></ul><ul><li>Therefore, the quantity of a good that Producers are willing to supply is less than the quantity demanded by Consumers. </li></ul><ul><li>To correct this, Producers can either increase production or raise prices. </li></ul>
  7. 7. From Disequilibrium back to Equilibrium <ul><li>A new price is then determined by the rebalancing of the forces of Supply and Demand to reach a new Equilibrium Point. </li></ul><ul><li>This is why prices constantly change – the forces of Supply and Demand are constantly changing! </li></ul>

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