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Price determination and equilibrium

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Notas de aulaSlidesQuestões de prática

Notas de aula

Market equilibrium

  • Equilibrium is the price and quantity where planned quantities demanded and supplied match over the specified period. Fictional demand P = 10 − 0.1Q and supply P = 2 + 0.1Q meet at Q40 and P6. Both the product and units need specifying.
  • No shortage or surplus at that price does not mean all needs are met or the allocation is fair. Ability to pay, external effects and information problems remain relevant. A model’s equilibrium is not a promise that every actual market instantly reaches it.

Fictional weekly equilibrium

Fictional weekly equilibriumO246810121420406080100Items per weekPrice per item (£)Demand(40, 6)Supply

Disequilibrium

  • In the fictional model, at P4 quantity demanded is 60 and supplied 20, a shortage of 40. At P8 demand is 20 and supply 60, a surplus of 40. Calculate the difference in the correct direction and use units per period.
  • In a flexible-price market, excess demand puts upward price pressure; excess supply encourages price cuts or inventory adjustments. Higher price contracts demanded quantity along demand and extends supply quantity along supply. Controls, contracts, inventories and production delays can slow or constrain adjustment.

Compare quantities at one price

Compare quantities at one pricePrice per itemWeekly quantities and gap£4Demand 60; supply 20; shortage 40£6Demand 40; supply 40; no gap£8Demand 20; supply 60; surplus 40

Price signals

  • Prices signal relative market conditions, ration purchases by willingness and ability to pay, and affect incentives for consumers and producers. A price change can encourage resource reallocation if firms can respond. Scarcity is the underlying resource problem, not something created by the price itself.
  • Price rationing does not allocate according to need, and a higher price is not evidence that social benefits exceed all social costs. Information, capacity, externalities and income distribution can limit efficiency and equity. Separate market-clearing predictions from value judgements.

Three functions of a price

Three functions of a priceFunctionMechanism and limitSignalInformation about relative marketconditionsIncentiveEncourages responses where feasibleRationingAllocates through willingness and abilityto payEquity limitNeed and ability to pay can differEfficiencylimitExternal effects and information maymatter

Effects of shifts

  • With conventional slopes and the other curve unchanged, demand rising raises equilibrium price and quantity; demand falling lowers both. Supply rising lowers price and raises quantity; supply falling raises price and lowers quantity. State the other-curve assumption.
  • Fictional demand D1 P = 10 − 0.1Q shifts to D2 P = 12 − 0.1Q against unchanged S P = 2 + 0.1Q: equilibrium Q40/P6 becomes Q50/P7. A separate supply experiment with D1 unchanged and supply P = 0.1Q instead gives Q50/P5. Do not combine the two experiments by accident.

Demand increases; supply unchanged

Demand increases; supply unchangedO246810121420406080100Items per weekPrice per item (£)D2D1(40, 6)Supply(50, 7)

Revenue on a price–quantity graph

  • For sales at a single price, TR = price × units sold. At P6/Q40, weekly revenue is £240. It is the rectangle from the origin to Q40 horizontally and P6 vertically; read-off guides define its sides. It is not the triangular area under a sloping curve.
  • In the separate demand-growth experiment P7/Q50 gives £350 revenue. In the supply-growth experiment P5/Q50 gives £250. These examples do not establish universal revenue changes, and neither gives profit without cost data.

Read price and quantity for revenue

Read price and quantity for revenueO246810121420406080100Items per weekPrice per item (£)Demand(40, 6)Supply

Limits

  • A binding and complied-with maximum below equilibrium creates excess demand in the standard unchanged-curve model. A binding minimum above equilibrium creates excess supply. At P4 the fictional shortage is 40; at P8 the surplus is 40. A maximum above equilibrium or minimum below it is non-binding in this model.
  • Actual policy outcomes depend on compliance, allocation, quality, supply responses and additional interventions such as government purchases. The gaps are model quantities, not proof of an exact measured outcome in every market. Contracts and frictions can also stop prices adjusting instantly without legal controls.

Controls in the fictional market

Controls in the fictional marketControlOutcome with unchanged curvesMaximum £4Binding; shortage 40 items per weekMaximum £8Non-binding at equilibrium £6Minimum £8Binding; surplus 40 items per weekMinimum £4Non-binding at equilibrium £6

Simultaneous shifts and identification

  • With conventional slopes, demand and supply both increasing raise equilibrium quantity, while their price pressures oppose each other. Without shift sizes and shapes, price direction is uncertain. Demand increasing while supply decreases raises price, but quantity direction is uncertain.
  • Describe the changed determinant and analyse each curve. A higher observed price could reflect demand growth, supply contraction or both; a single price or sales observation does not establish the cause. Keep comparisons, periods and units consistent.

Both curves shift: conventional slopes

Both curves shift: conventional slopesChangesWhat can be concludedDemand up; supply upQuantity up; price uncertainDemand down; supply downQuantity down; price uncertainDemand up; supply downPrice up; quantity uncertainDemand down; supply upPrice down; quantity uncertain

Slides

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CADASTRE-SE — GRÁTISENTRAR

Questões de prática

Prévia grátis — 8 de 35 perguntas. Cadastre-se para ver todas.

  1. 1.What is a shortage?

    Easy
    • Aquantity demanded exceeds quantity supplied at the current price
    • Bsupply exceeds demand
    • Cequilibrium
    • Dno market

  2. 2.What is a surplus?

    Easy
    • Ademand exceeds supply
    • Bequilibrium
    • Cno market
    • Dquantity supplied exceeds quantity demanded at the current price

  3. 3.With flexible prices in the standard competitive model, what pressure does a shortage put on price?

    Easy
    • Ait stays
    • Bit vanishes
    • Cit tends to rise
    • Dit tends to fall

  4. 4.With flexible prices in the standard competitive model, what pressure does a surplus put on price?

    Easy
    • Ait vanishes
    • Bit tends to fall
    • Cit tends to rise
    • Dit stays

  5. 5.What is the price mechanism?

    Easy
    • Aprices adjusting to balance demand and supply
    • Ba government plan
    • Ca tax
    • Da subsidy

  6. 6.What does 'market clears' mean?

    Easy
    • Athe market closes
    • Bsupply is zero
    • Cdemand is zero
    • Dquantity demanded equals quantity supplied

  7. 7.With upward-sloping supply unchanged, what happens to equilibrium price when demand shifts right?

    Easy
    • Ait stays
    • Bit vanishes
    • Cit rises
    • Dit falls

  8. 8.With upward-sloping supply unchanged, what happens to equilibrium quantity when demand shifts right?

    Easy
    • Ait vanishes
    • Bit rises
    • Cit falls
    • Dit stays

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CADASTRE-SE — GRÁTISENTRAR

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