1. The Free Market Price: EQUILIBRIUM Ch. 6, Sect. 1-3
What does it mean when the “price is right”?
How does a free market determine equilibrium prices?
How do changes to demand and supply affect the equilibrium price?

2. How a market works
In a free market, demand and supply work together to create prices
This causes market equilibrium, where the quantity demanded of a g/s equals the quantity supplied of that g/s (Qd=Qs)
Satisfaction of both consumers & producers— “balance” of the market

3. When the “Price is Right”
Have to find the right price at which this happens in a market (equilibrium price)
Also called “market-clearing price”
because the market will be clear of
shortages and surpluses
The quantity of g/s at equilibrium
is called the equilibrium quantity
can be graphed using Qd/Qs
schedule

4. Graphing equilibrium What is the equilibrium price?
What is the equilibrium quantity?

5. Quick check What is equilibrium?
Why do consumers and producers care about equilibrium?
What happens if the market isn’t in equilibrium (too much? too little?)

6. The Market Price
Remember the “invisible hand”? When consumers and producers willingly interact in order to buy/sell g/s?
This interaction will also push the market price, or the price a willing consumer will pay to a willing producer for a g/s, towards equilibrium price
Economists therefore say that the law of demand and law of supply will always act together to reach equilibrium

7. What Happens if the Price Isn’t Right?
If producers set a price above or below equilibrium, it is known as disequilibrium
The result can be a shortage: Qd > Qs at a certain price
this is also called excess demand—too many customers for too few goods
This means that the price is too low
The result can be a surplus: Qd < Qs at a certain price
This is called excess supply—too many producers for too few customers
This means the price is too high

8. Graphing disequilibrium: Excess demand (shortage)
What happens to demand when the price is set $1.00 below equilibrium?

9. Graphing disequilibrium: Excess supply (surplus)
What happens to supply when the price is set $1.00 above equilibrium?

10. Quick check What does it mean if there is disequilibrium?
What does excess supply mean for the price of a good?
What does excess demand mean for the price of a good?
How long do you think it would take for a market to reach equilibrium?