Summary
Highlights
The price mechanism is the process where buyers and sellers agree on a price. Buyers desire lower prices, while sellers aim for higher prices to maximize profit. This involves a negotiation between consumers and businesses.
Market equilibrium is the point where demand and supply are equal, also known as the market clearing price. At this price, there are no shortages or surpluses, indicating allocative efficiency. An example is given where 120,000 units are demanded and supplied at $35.
Market disequilibrium occurs when demand and supply are not equal, leading to inefficiency with either shortages or surpluses. If the price is $25, there is an excess demand of 10,000 units. If the price is $45, there is an excess supply of 11,000 units.
Excess demand occurs when the price falls, leading to an increase in demand and a decrease in supply. This creates a shortage, which is the distance between the quantity demanded (QD) and quantity supplied (QS).
Excess supply happens when the price increases. According to the law of demand, demand contracts, and according to the law of supply, supply increases. This results in supply being greater than demand, with the excess being the distance between QS and QD.