price mechanism

• Demand curve shifting right


  1. Find disequilibrium

  2. Excess demand/shortage

  3. Prices rise

  4. Incentivize firms to increase output

  5. Ration scarce resources
• Demand curve shifts right

  Equilibrium price and quantity increase
• Supply curve shifting right

  1. Find disequilibrium

  2. Excess supply/surplus

  3. Prices fall

  4. Incentivize firms to reduce output

  5. Ration scarce resources
• Supply curve shifts right

  Equilibrium price falls, quantity increases
• There are two shifts left to cover: demand shifting left, supply shifting left
• The disequilibrium for demand shifting left is excess demand/shortage
• The disequilibrium for supply shifting left is excess supply/surplus
• The functions of the price mechanism are used to move from one equilibrium to a new equilibrium in all cases of demand or supply shifts