Economics, Chapter Five Market Clearing Price (Balance in the Market)
Market-Clearing Price (MCP)/  Equilibrium Price (e) <ul><li>The price @ which sellers want to sell & buyers want to buy.  ...
When Supply ≠ Demand <ul><li>Shortage : P < MCP </li></ul><ul><li>amt. supplied is  less  than amt. demanded </li></ul><ul...
When Supply ≠ Demand <ul><li>Surplus:  P > MCP. Sellers want to sell more than consumers will buy </li></ul><ul><ul><li>Re...
Role of Prices <ul><li>Send Signals </li></ul><ul><ul><li>Info. to both buyers and sellers </li></ul></ul><ul><li>Ration <...
Changes in Price & Production <ul><li>S & D can go    &     </li></ul><ul><li>As S & D  changes , so does MCP!  </li></u...
Changes in Price &  Production (cont’d) <ul><li>Taco Market (supply   ) </li></ul><ul><ul><li>Floods have killed 1/2 of t...
Changes in Price &  Production (cont’d) <ul><li>Demand    can also cause a    in Market-Clearing Price. What happens if ...
Reasons for M.C.P.   <ul><li>   in technology:  tech.      in supply & M.C.P. (how?) </li></ul><ul><li>   in consumer ...
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
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Market Clearing Price

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Market Clearing Price

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

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