The Determination of Equilibrium Market Prices

EQUILIBRIUM= the price at which demand is equal to supply and there is no tendency for change
DISEQUILIBRIUM= a situation within the market where supply does not equal demand.
EXCESS SUPPLY= when supply at a particular price is greater than demand; this should signal to producers to lower prices
EXCESS DEMAND= when demand is greater than supply at a given price
MARKET-CLEARING PRICE= the price at which all goods that are supplied will be demanded
Excess Supply and Excess Demand
The effect of a TAX
1. always affects SUPPLY
2. 1. price rise to the consumer is P1P2
    1. the tax is the vertical distance between the two supply curves so is greater than the price rise to the consumers
  2. P2= Ptax
The effect of a SUBSIDY
1. always affects SUPPLY
3. price rise to the consumer is P1P2
  1. the subsidy is the vertical distance between the two supply curves (P1P3)
4. P2= Psub
PRICE CEILINGS AND PRICE FLOORS
1. Maximum prices (price ceilings)
  1. 1. has to be set below equilibrium to have an effect
    2. there will be excess demand as the price is low, this can be dealt with through queues, waiting lists etc but may result in a black market emerging
2. Minimum prices (price floors)
  1. 1. has to be set above equilibrium (free market price) to have an effect
    2. e.g. minimum wage, designed to increase standards of living for low paid workers
3. can distort the signals within the market as they're imposed by the government and are not natural, leading to a misallocation of resources

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