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Price Determination in Markets
Price Determination in Markets
MARKETS
The market demand curve shows the amount
demanded at every price.
The market supply curve shows the amount supplied
at every price.
The question now is whether there is some price at
which the quantities supplied and demanded are
the same.
Markets slide 1
EQUILIBRIUM PRICE
DEFINED
The equilibrium price of a good is:
a price at which quantity supplied equals quantity
demanded.
a price at which excess demand equals zero.
Markets slide 2
Excess demand exists when, at the current
price, the quantity demanded is greater than
quantity supplied.
Markets slide 3
Excess supply = Qs - QD
price
EXCESS
EXCESS SUPPLY
SUPPLY
supply
p = $3
demand
QD QS
Market for tacos quantity
Markets slide 4
Excess demand = QD - QS
price
supply
EXCESS
EXCESSDEMAND
DEMAND
p = $1
demand
QS QD quantity
Market for tacos
Markets slide 5
When there is EXCESS DEMAND for a
good, price will tend to rise.
Markets slide 6
When excess demand equals zero, price must
be the equilibrium price, and we say the
market is in equilibrium.
If you want to find out the price at which a market
is in equilibrium, then look for the price where the
excess demand is zero.
Markets slide 7
Economists are interested in the explaining
equilibrium prices.
Markets slide 8
What is the equilibrium price in the market for tacos?
Show it on the diagram. What is the equilibrium
quantity of tacos?
P supply
$4
$3
p = $2
$1 demand
Q
TACO MARKET
Markets slide 11
Changes in demand can be caused by:
Markets slide 14
Classes at Lansing Community College are an
inferior good. People’s incomes fall, perhaps
due to a recession. What is the effect on LCC
tuition and enrollment?
P
supply
p0
demand @ high income
q0 Q
LCC ENROLLMENT
Markets slide 15
Go to hidden slide
THE MARKET FOR APARTMENTS IN EAST
LANSING IS IN EQUILIBRIUM, AND MSU
RAISES THE PRICE OF DORM ROOMS.
WHAT IS THE EFFECT ON THE MARKET
FOR APARTMENTS IN EAST LANSING?
P supply
p0
demand
Q
q0
E.L. APARTMENTS
Markets slide 17
Go to hidden slide
Nachos and beer are complements. The price of beer
rises. What is the effect on the market for nachos?
P supply
p0
demand @ old beer price
Q
q0
NACHO MARKET
Markets slide 19
Go to hidden slide
People come to believe that eating apples is good for
them. The more apples they eat, the more likely they
are to stay well. What is the effect on the market for
apples?
P supply
p0
demand
Q
q0
APPLE MARKET
p0
demand
q0 Q
Enrollment
P supply
p0
demand
q0 Q
CORN MARKET
p0
D at lower income
Q0 Q
Markets slide 29