MARKET CLEARING PRICE

1
MARKET CLEARING PRICE

• UNIT FOUR

2
DEMAND AND SUPPLY

• Question
• Since consumers want to buy when prices are
  low and producers want to sell when prices are
  high, how is a price for a good or service
  derived?

3
MAKING A MARKET CLEAR

• The price at which the supply and demand curves
  intersect, where supply equals demand, is the
  market clearing price or market equilibrium
• This is the only price at which sellers want to
  sell as much as buyers want to buy

4
What if the price is below the market clearing
level?

• A shortage occurs
• Shortage is how much more of a product buyers
  want to buy then sellers want to sell at a given
  price

5
Example of Shortage

• At 0.50 buyers want to buy 29 million gallons
  of gasoline, but producers want to sell only 4
  million gallons.
• The difference between these two amounts, 25
  million gallons, is a shortage

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What happens if the price is above its market
clearing level?

• A surplus occurs
• Surplus is how much more of a product sellers
  want to sell than buyers want to buy at a given
  price

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Example of Surplus

• At 2.50 per gallon producers want to sell 27
  million gallons per week, but buyers want to buy
  only 11 million gallons. The difference between
  these amounts, 16 million gallons, is a surplus

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What pushes price toward its market clearing
level in both situations?

• COMPETITION!
• Competition among buyers pushes prices up toward
  their market clearing levels
• Competition among sellers pushes prices down
  toward their market clearing levels

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PRICES THAT RATION

• Ration- The distribution or allocation of
• a product
• Rationing needs to be done when a product or
  service is scarce because there is not enough to
  satisfy all of everyones wants

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Ways in which we ration

• Auction (the one who is willing and able to buy
  the product at the market clearing price wins the
  auction)
• The Regular Marketplace (prices are set in a
  manner that only those willing and able to buy
  scarce goods have that opportunity) Example
  Diamonds

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PRICES THAT MOTIVATE

• Besides rationing, market prices provide
  incentives for people to produce goods and
  services.
• Market prices guide decisions about what (and
  how much) to produce and how to produce these
  goods and services.

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CHANGES IN PRICES AND PRODUCTION

• Demands and supplies are continually changing,
  causing some market-clearing prices to rise and
  some to fall.
• These higher and lower prices cause some
  businesses in our economy to expand and others to
  contract.

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A comparison of the Fortune 500 businesses
illustrates some of these changes
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Top Ten Companies in the Fortune 500

• 1954
• 1. General Motors
• 2. Standard Oil (Exxon)
• 3. U.S. Steel
• 4. General Electric
• 5. Swift (Meat)
• 6. Chrysler
• 7. Armour (Meat)
• 8. Gulf Oil
• 9. Socony-Vacuum Oil
• 10. Du Pont (Plastics)

• 2004
• 1. Wal-Mart
• 2. Exxon Mobil
• 3. General Motors
• 4. Ford Motor Company
• 5. General Electric
• 6. Chevron Texaco
• 7. Conoco Phillips
• 8. Citigroup
• 9. International Business Machines
• 10. American International
• Group

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INFORMATION AND INCENTIVES

• INFORMATION
• Market clearing prices summarize the
  preferences of consumers, telling producers what
  consumers want most.
• They also tell consumers about the producers
  costs of satisfying those wants.

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INFORMATION AND INCENTIVES

• Businesses have an incentive to conserve and
  efficiently use their scarce and costly
  resources. If a business can keep its production
  costs low, then it can earn a profit by selling
  its product at the market-clearing price
• Consumers have an incentive to reduce their
  consumption of particular products to fit the
  supplies available