ECONOMICS 12
2.3 - price
Price
The discussion including price has, thus far in the course, been
incomplete. Prices of goods and services do not just ‘happen’ in the
market, neither from consumers choosing a price they’d pay, nor from
firms choosing a price at which they’d sell. Instead, prices come about
as the result of certain interactions. The key interactions that
determine price, are the interactions between the demand and supply
curves.
This section will introduce just how the demand and supply model can
be used to explain how both price and quantity of goods and services
are determined.
Market Equilibrium
When examining a graph containing both D and S curves, one will market equilibrium...is the
notice immediately that the D and S curves intersect. They intersect point at which D and S
because they have opposite slopes. The point at which they intersect is curves intersect...the point
where D = S
called the market equilibrium. The equilibrium price is the P at which
D exactly equals S (price P1 on diagram below); while the equilibrium equilibrium price...is the P
quantity is the Q at which D exactly equals S (quantity Q1 on diagram at market equilibrium,
below). The equilibrium P is the ideal P from both the buyers’ and the where D = S
sellers’ perspective. Also, the equilibrium Q is the quantity at which equilibrium quantity...is the
exactly the right amount of units are supplied/produced, and they are Q at market equilibrium,
all purchased by consumers, without any consumers left wanting. where D = S
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Changes to Demand & Supply - A Review
Demand and supply change almost constantly. Demand changes variables of
demand...things that cause
because of the influence of the following six variables of demand:
demand to change, such as:
● price of the product itself
● price of the product
● consumer income
● consumer income
● prices of related goods ● prices of related goods
● consumer tastes ● consumer tastes
● consumer expectations ● consumer expectations
● the number of buyers in the market ● number of buyers in the
market
Supply, on the other hand, changes because of the influence of the
following six variables of supply: variables of supply...things
● price of the product itself that cause supply to change,
● cost of production inputs such as:
● changes in technology ● price of the product
● cost of production
● prices of other products produced by firm
inputs
● number of suppliers in the market
● changes in technology
● expected future prices of the product
● prices of other
products produced by
Most of the above variables (except for the price of the product) result the firm
in a shift/movement of either the D or S curve. Shifts such as these ● number of suppliers in
would cause changes in either/both P and Q. The next section presents the market
some examples of how P and Q are affected by shifts in D and S curves. ● expected future prices
of the product
Examples of Changes to Demand & Supply
Example 1: a change in D; no change to S
D goes up, S stays the
same...both P and Q go up
D goes down, S stays the
same...both P and Q go
down
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Example 2: a change in S; no change to D
S goes down, D stays the
same...P goes up, Q goes
down
S goes up, D stays the
same...P goes down, Q goes
up
Example 3: when both D & S change, and D changes more than S
both D and S increase, but D
increases more...both P and
Q go up
both D and S decrease, but
D decreases more...both P
and Q go down
Example 4: when both D & S change, and S changes more than D
both D and S increase, but S
increases more...P goes
down, and Q goes up
both D and S decrease, but S
decreases more...P goes up,
and Q goes down
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Surplus & Shortages
Although market equilibrium clearly shows where P and Q ‘should’ be,
it is more likely that prices and quantity will be at some point above or
below the equilibrium price. When this happens, a surplus or shortage
situation occurs. A surplus is where S is greater than D at a given P. surplus...is where the S is
greater than the D at a
When there is a surplus, there is downward pressure on P, until it given P
reaches the equilibrium P. On the other hand, a shortage occurs when
D is greater than S at a given P. During a shortage, there is upward shortage...is where the D is
pressure on P, until it reaches the equilibrium P. For example, at price greater than the S at a given
P
P2 in the diagram below, there is a surplus (as indicated). Also, at price
P3 in the diagram below, there is a shortage (as indicated).
Demand & Supply Model
Understanding the demand and supply model is invaluable to the study
of economics. This same model may be applied to essentially any
market structure. The objective of this study guide was to introduce
the final piece of the demand and supply model - price determination.
KSS - Kletke - ECON 12 2.3 -- Page 4
