How markets work

How markets work - price, too many people want the product...

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20 September 2011 Econ How Markets work Equilibrium price:  the price that equates quantity supplied with quantity  demanded and clears the market Equilibrium quantity:  the quantity supplied and quantity demanded at the  equilibrium price Surplus : when quantity supplied is greater than quantity demanded at a given  price Amount of goods left after you subtract the goods sold, they have to end up decreasing prices to reduce the surplus Facing a surplus, sellers try to increase sales by cutting price. QD increases and QS decreases. ..which reduces the surplus. Prices continue to fall until market reaches equilibrium. o Market at rest no more movement in prices because we arrived at the price where the market is cleared Shortage : when quantity demanded is greater than quantity supplied at a given 
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Unformatted text preview: price, too many people want the product but there isn’t enough for everyone to have • Firms then tend to increase prices • Example: If P = $1, • then QD = 21 lattes • and QS = 5 lattes • resulting in a shortage of 16 lattes • Facing a shortage, sellers raise the price, • causing QD to decrease and QS to increase,. .which reduces the shortage. • Prices continue to rise until market reaches equilibrium. When you think you have an equalibrium there can be a shock • A supply shock decreases in supply Another kind of a shock • Demand shock, demand curve shifts to the right What if these shocks occur at the same time *Any change in technology affects the supply curve...
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This note was uploaded on 11/16/2011 for the course ECON 1011 taught by Professor Irenefoster during the Fall '11 term at GWU.

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