Market Clearing Price

Economics, Chapter Five Market Clearing Price (Balance in the Market)

Market-Clearing Price (MCP)/ Equilibrium Price (e) The price @ which sellers want to sell & buyers want to buy. -Supply = Demand Market “clears” $30 s $25 $20 $15 MCP $10 $5 d $0 1 2 3 4 5 6 7

The price @ which sellers want to sell & buyers want to buy.

-Supply = Demand

Market “clears”

When Supply ≠ Demand Shortage : P < MCP amt. supplied is less than amt. demanded Buyers compete to consume Buyers are willing to pay more $  Results of Shortages: Buyers reduce amount of goods & svcs they want Producers work to increase the amount they produce As long as price is less than market-clearing price, buyers increase demand Eventually market-clearing will be re-established

Shortage : P < MCP

amt. supplied is less than amt. demanded

Buyers compete to consume

Buyers are willing to pay more $

 Results of Shortages:

Buyers reduce amount of goods & svcs they want

Producers work to increase the amount they produce

As long as price is less than market-clearing price, buyers increase demand

Eventually market-clearing will be re-established

When Supply ≠ Demand Surplus: P > MCP. Sellers want to sell more than consumers will buy Results of surplus: Sellers begin to compete more for consumers SALE: offer goods & svcs @ lower prices Price begins to fall, demand increases Sellers reduce the amount they want to sell as price falls Market-Clearing then is reached as demand = supply again

Surplus: P > MCP. Sellers want to sell more than consumers will buy

Results of surplus:

Sellers begin to compete more for consumers

SALE: offer goods & svcs @ lower prices

Price begins to fall, demand increases

Sellers reduce the amount they want to sell as price falls

Market-Clearing then is reached as demand = supply again

Role of Prices Send Signals Info. to both buyers and sellers Ration Determine who will get good or svc. Auctions, as well as decisions whether or not to buy Motivate Can get Buyers to Demand, or Producers to Supply No $ in it, not worth supplying!

Send Signals

Info. to both buyers and sellers

Ration

Determine who will get good or svc.

Auctions, as well as decisions whether or not to buy

Motivate

Can get Buyers to Demand, or Producers to Supply

No $ in it, not worth supplying!

Changes in Price & Production S & D can go  &  As S & D changes , so does MCP! If S  faster than D,  in MCP If D  faster than S,  in MCP If S  at same rate as D, no change in MCP

S & D can go  & 

As S & D changes , so does MCP!

If S  faster than D,  in MCP

If D  faster than S,  in MCP

If S  at same rate as D, no change in MCP

Changes in Price & Production (cont’d) Taco Market (supply  ) Floods have killed 1/2 of the nation's cattle (less beef). How will this effect the taco market in the state?  $3 MCP2 P R $2 MCP1 I C $1 E 0 1 2 3 4 5 6 # TACOS

Taco Market (supply  )

Floods have killed 1/2 of the nation's cattle (less beef). How will this effect the taco market in the state?



$3 MCP2

P

R $2 MCP1

I

C $1

E

0 1 2 3 4 5 6

# TACOS

Changes in Price & Production (cont’d) Demand  can also cause a  in Market-Clearing Price. What happens if all of a sudden medical research shows that eating tacos makes you smart:  $3 P R $2 I C $1 E 0 1 2 3 4 5 6 # TACOS

Demand  can also cause a  in Market-Clearing Price. What happens if all of a sudden medical research shows that eating tacos makes you smart:



$3

P

R $2

I

C $1

E

0 1 2 3 4 5 6

# TACOS

Reasons for M.C.P.   in technology: tech.  in supply & M.C.P. (how?)  in consumer taste: consumers want of product  in demand & M.C.P. (how?)  weather: bad weather destroying crops  in supply & M.C.P. (how?)

 in technology: tech.  in supply & M.C.P. (how?)

 in consumer taste: consumers want of product  in demand & M.C.P. (how?)

 weather: bad weather destroying crops  in supply & M.C.P. (how?)

Price Quantity Demand Supply Market Clearing or Equilibrium Price P 1 P 2

Price Quantity Demand Supply Market Clearing or Equilibrium Price P 1 Q 1 P 2 Q S Q D Shortage

Price Quantity Demand Supply Market Clearing or Equilibrium Price P 1 Q 1 P 2 Q S Q D Shortage

Price Quantity Demand Supply Market Clearing or Equilibrium Price P 1 Q 1 P 2 Q S Q D Surplus