General questions about Market Equilibrium

How does the forces of demand and supply eliminate excess supply?

Scenario: suppose the eq. price is $3 However, producers are greedy and charge a higher price for their goods/service i.e. at price = $5 Events: 1. Quantity supplied is greater than quantity demanded 2. Results in unsold output 3. Firms need to get rid of this output - thus, they lower the price to encourage consumers to buy more. 4. As price falls, Qs becomes smaller and Qd becomes bigger until Qs = Qd Conclusion: When there is a surplus, there is downward pressure on price to fall until market eq. is achieved.

How does the forces of demand and supply eliminate excess demand?

Scenario: suppose the eq. price is $3 However, the price is set $1 Event: 1. Qd is greater than Qs => shortage 2. Firms raise price so as to increase supply (because they are willing and able to produce more at a higher price) 3. As a result, Qd begins to fall and Qs begins to rise. Conclusion:When there is a shortage/excess demand, there is upward pressure on price to rise until market eq. is achieved.

What is equilibrium price?

The price at which quantity demand is equal to quantity supplied.

What is excess demand?

The state at which quantity demanded exceeds quantity supplied i.e. there is a shortage of supply to satisfy the current demand.

What is market equilibrium?

The state at which quantity demanded is equal to quantity supplied i.e. demand and supply are balanced.

What is excess supply?

The state at which quantity supply exceeds quantity demanded i.e. there is a surplus.

What is the market-clearing price?

• Aka market equilibrium • The state at which quantity supplied is equal to quantity demanded.

How to achieve the market equilibrium after changes in demand?

• Remember: changes in demand happen because of changes in the non-price factors of demand Scenario: suppose income rises and the demand for a normal good increases. Events: 1. Consumer's income increases 2. Demand for normal good increases -> rightward shift of D curve 3. At the current eq. price, Qd is greater than Qs - a shortage in supply 4. Causes upward pressure on price - thus, price rises 5. Increase in price leads to rightward movement along the S curve and a leftward movement along the new D curve 6. Market eq. is achieved.