1.2.6: Price determination

• Price equilibrium point: Where supply is equal to demand. Also known as market clearing price
• If price is set below equilibrium, there is excess demand, causing a shortage in the market and firms will increase prices to cut shortages in supply
• If price is set above equilibrium, there is excess supply, causing a decrease in price so the supply can be used up
• A decrease in supply causes increase in price and decrease in output, while decrease in demand causes decrease in price and output