Determination of market equilibrium

• How is the price of goods and services determined in a market system?

  In a market system, prices for goods/services are determined by the interaction of demand and supply 
• What is a market and what are the 2 types of market?

  • A market is any place that brings buyers and sellers together
  • Markets can be physical (e.g. McDonald's) or virtual (e.g. eBay)
• What do buyers do in a market system?

  • Buyers and sellers meet to trade at an agreed-upon price
  • Buyers agree the price by purchasing the good/service
  • If they do not agree on the price, then they do not purchase the good/service and are exercising their consumer sovereignty
• What do sellers do with the prices of their goods and services in a market system?

  sellers will gradually adjust their prices until there is an equilibrium price and quantity that works for both parties

  • At the equilibrium price, sellers will be satisfied with the rate/quantity of sales
  • At the equilibrium price, buyers are satisfied with the utility that the product provides
• When does equilibrium occur in a market and what is this point called?

  • Equilibrium occurs in a market when demand = supply
  • At this point, the price is called the equilibrium or market-clearing price
  • This is the price at which sellers are clearing (selling) their stock at an acceptable rate

  
• What is disequilibrium?

  • Disequilibrium occurs whenever there is excess demand or excess supply in a market
  • If demand > supply, the market is facing excess demand
  • If demand < supply, the market is facing excess supply
• When does excess demand happen?

  • Excess demand occurs when the demand is greater than the supply
  • It can occur when prices are too low or when demand is so high that supply cannot keep up with it - shortage

  
• What is the market response to disequilibrium because of excess demand?

  • Sellers realise they can increase prices and generate more revenue and profits
  • Sellers gradually raise prices
  • This causes a contraction in QD as some buyers no longer desire the good/service at a higher price
  • This causes an extension in QS as other sellers are more incentivised to supply at higher prices
  • In time, the market will have cleared the excess demand and arrive at a position of equilibrium, PeQe
• How does excess supply occur?

  • Excess supply occurs when the supply is greater than the demand
  • It can occur when prices are too high or when demand falls unexpectedly - surplus

  
• What is the market response to dis equilibrium being caused by excess supply?

  • Some buyers are not willing to pay the high price
  • Sellers will gradually lower prices in order to generate more revenueThis causes a contraction in QS as some sellers no longer desire to supply masks
  • This causes an extension in QD as buyers are more willing to purchase masks at lower prices
  • In time, the market will have cleared the excess supply and arrive at a position of equilibrium, PeQe
• What is a demand and supply schedule?

  • A demand and supply schedule shows the quantity demanded and the quantity supplied of a product at different price levels
  • Demand and supply schedules can be used to identify equilibrium and disequilibrium 

  
• Real world markets that are constantly changing are referred to as what ?

  • Real world markets are constantly changing and are referred to as dynamic markets