Markets exist for the vast majority of goods and services. Markets can be defined broadly or narrowly. For example there are the consumer goods, capital goods, commodities, financial and labor markets. Each of these broad categories can be broken down into more specific markets. For example within the financial market there are markets for foreign exchange and for long term loans, within the corn modifies market there are the markets for corn and copper and within the consumer goods market there are the markets for clothes and cars. Prices usually play an important role in these markets.
EQUILIBRIUM PRICE AND OUTPUT:-
In the absence of government intervention, price is determined by demand and supply. The equilibrium price is where demand and supply are equal. At this point there are no forces causing the price to change. The quantity which consumers want to buy will equal the quantity which producers want to sell at the current price.
At prices higher than the equilibrium price the quantity supplied will be greater than the quantity demanded and the excess supply would oblige sellers to lower their prices in order to dispose of their output. For example, if price is 40p supply would exceed demand by 110. This situation, illustrated in Figure 11.2, where supply exceeds demand and there is downward pressure on price is sometimes described as a buyers’ market.
At prices lower than the market price, e.g. 2Op, the quantity demanded will exceed the quantity supplied, giving rise to a condition known as a sellers’ market. This is illustrated in Figure I I .3.
The equilibrium or market price is 3Op, because at any other price there are market forces at work which tend to change the price.
CHANGES IN EQUILIBRIUM PRICE:-
As market prices are determined in free markets by the interaction of demand and supply, changes in market prices are due to changes in demand or supply, or both.
THE EFFECTS OF SHIFTS IN... [continues]
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