Free Price System

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Free Price System
Professor Jermaine Whirl, MBA, BA, AA, CLF
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Demand Supply Together
Using our Demand and Supply Schedules, we can
find out where the Market Clearing Price or
Market Equilibrium Price would be. This is price
in which the buyers and sellers in this market
would both be satisfied with this transaction, at
a particular time, location, quantity, and
price. In this example a Quantity of 6 Hats
6.00 would be the Market Clearing Equilibrium.
QD QS Prices 12 0 0.00 10 2 2.00 8 4 4.00 6 6
6.00 4 8 8.00 2 10 10.00 0 12 12.00
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Free Price System
P
QD QS Prices 12 0 0.00 10 2 2.00 8 4 4.00 6 6
6.00 4 8 8.00 2 10 10.00 0 12 12.00
12
S
6
Supply Price
1
D

12
6
Q
0
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Demand Supply ScheduleNew Example
Information obtain by http//www.hmi.missouri.edu
/index.php?qnode/65
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New Example Graphical Presentation
Picture and Information obtain by
http//www.hmi.missouri.edu/index.php?qnode/65
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Disequilibrium in the Free Price System

• Shortages- are when overall Quantity Demanded
  exceeds overall Quantity Supplied of a good or
  service.
• Any Price lower than the equilibrium price will
  create a shortage!
• Buyers will want to buy more goods than sellers
  want to sell.

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Effects of Shortages

• Black Markets
• Price discrimination
• Artificial Controls on Demand (such as rationing)
• Non-Monetary bargaining methods (queuing system,
  nepotism, or even violence)
• Inability to purchase a product.

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Graphical Presentation of Shortages
As you can see Quantity Demanded Exceeds Quantity
Supplied (leaving the blue area a shortage
situation)
12
S
6
Price
4
D
Shortage
12
6
QD
QS
Quantity
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What causes Shortages?

• Price ceilings are the major cause of shortages.
• Price ceilings are a restriction imposed by the
  government that prohibits a price going above a
  certain level.
• The ceiling is set below the equilibrium price-
  causing a shortage.
• Famous example is the 1970s gas shortage, and
  rent controls in NYC.

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Shortage Conclusion

• Shortage can be corrected by allowing market
  prices to rise to the equilibrium price and
  quantity of the market.
• Prices must increase in the long-run to adjust
  and put the market back to equilibrium.

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Disequilibrium in Markets

• Surplus- At any price higher than the equilibrium
  price, there will be a surplus.
• Sellers want to supply more goods and services
  than buyers want to buy.
• Any price above the equilibrium price will cause
  a surplus.
• Quantity supplied exceeds quantity demanded
• Example would you want to buy a good or service
  that you believe is unreasonably price what it is
  worth?

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Effects of Surpluses

• Dumping
• Major decreases in market prices
• Price supports (unfair)

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Graphical Presentation of Surpluses.
12
S
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Surplus
As you can see Quantity Supplied is exceeding
Quantity Demanded leaving the blue area as a
surplus area.
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Price
D
6
12
QS
QD
Quantity
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What causes surpluses?

• Price Floor- is a restriction imposed by the
  government that prohibits the price from falling
  below a certain level.
• The ceiling is set above the equilibrium market
  clearing price.

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Surplus Conclusions

• Surpluses can be corrected by lowering one's
  prices.
• This will attract more demand for the good or
  service.
• This will also drive down the quantity supplied
  to equal the quantity demanded.