price mechanism

• What happens to price and quantity when demand shifts to the right in the market?

  Both increase
• When demand shifts to the right, the price initially remains unchanged.
• When demand shifts to the right at a price of p1, there is an excess demand
• What signal do producers receive when there is excess demand?

  Price is too low
• When producers increase prices, there is a contraction along the demand curve and an extension along the supply
• Excess demand leads producers to increase prices to maximize profits.
• What is the new equilibrium condition when demand shifts to the right?

  Demand equals supply
• The price mechanism can reallocate scarce resources without government intervention.
• What did Adam Smith call the self-regulating force of the market?

  Invisible hand
• Steps in the process when demand shifts to the right

  1️⃣ Demand shifts to the right at the same price

  2️⃣ Excess demand occurs

  3️⃣ Producers receive signal to increase price

  4️⃣ Price rises, quantity increases

  5️⃣ New equilibrium is reached
• The price mechanism ensures that excess demand is eliminated through price adjustments.
• When supply shifts to the right, the price decreases and the quantity increases
• At what price does the supply curve shift to the right initially?

  Same price
• When supply shifts to the right at a price of p1, there is an excess supply.
• When producers lower prices, there is a contraction along the supply curve and an extension along the demand
• What signal do producers receive when there is excess supply?

  Price is too high
• What is the new equilibrium condition when supply shifts to the right?

  Demand equals supply
• Steps in the process when supply shifts to the right

  1️⃣ Supply shifts to the right at the same price

  2️⃣ Excess supply occurs

  3️⃣ Producers receive signal to lower price

  4️⃣ Price falls, quantity increases

  5️⃣ New equilibrium is reached
• The price mechanism can perfectly reallocate scarce resources through continuous price adjustments.
• What happens to price and quantity when supply shifts to the left?

  Price increases, quantity decreases
• When demand shifts to the left, the price decreases and the quantity decreases
• How does the price mechanism ensure efficient allocation of scarce resources?

  Through market signals
• The price mechanism relies on the interaction of producers and consumers without government intervention.
• Match the shift in demand/supply with its effect on price and quantity:

  Demand shifts to the right ↔️ Price increases, quantity increases

  Supply shifts to the right ↔️ Price decreases, quantity increases

  Demand shifts to the left ↔️ Price decreases, quantity decreases

  Supply shifts to the left ↔️ Price increases, quantity decreases
• The price mechanism may involve multiple price adjustments to eliminate excess supply or demand.