Chapter 8 part 2 - Agec105 Chapter 8 Supply and Demand Part...

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Chapter 8: Supply and Demand Part 2 Agec105
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Equilibrium: Putting Supply and Demand Together When a market is in equilibrium Both price of good and quantity bought and sold have settled into a state of rest Equilibrium price, p*, is a “Market clearing” price: Price at which quantity supplied equals quantity demanded. This quantity is called the Equilibrium quantity, Q*. The equilibrium price and equilibrium quantity can be found on the vertical and horizontal axes, respectively At point where supply and demand curves cross
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Market Equilibrium E P* Demand Supply Q* Equilibrium price (p*) : the price that “balances” quantity supplied and quantity demanded. Quantity Price Equilibrium
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Excess Demand or Shortage E H J D S p* Excess Demand Quantity Price p 1 Q 1 Q 2 Suppose price starts out below the equilibrium level: Disappointed demanders will bid up the price, driving price up toward equilibrium. Q*
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Excess Demand or Shortage Excess demand At a given price, the excess of quantity demanded over quantity supplied Price of the good will rise as buyers compete with each other to get more of the good than is available
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Excess Supply or Surplus K L E D S Excess Supply Quantity Price p* Q 1 Q 2 Q* Suppose price starts out of the equilibrium level: Disappointed supplier will undercut rivals’ prices, driving price down toward equilibrium. p 1
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Excess Supply or Surplus Excess Supply At a given price, the excess of quantity supplied over quantity demanded Price of the good will fall as sellers compete with each other to sell more of the good than buyers want
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8 Why Government Would Like to Control Prices?
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9 Why Government Would Like to Control Prices? Government intervenes to regulate prices – Price Control . Why? Equilibrium: Quantity Demanded = Quantity Supplied Buyers would always like to pay less if they could Sellers would always like to get more money from what they sell Price Control Upper Limit – Price Ceilings Lower Limit – Price Floors
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10 Price Ceilings Government-imposed maximum price that prevents the price of a good from rising above a certain level in a market Short side of the Market Smaller of quantity supplied and quantity demanded at a particular price When quantity supplied and quantity demanded differ, short side of market will prevail Price ceiling creates a shortage and increases the time and trouble required to buy the good
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