The market mechanism , Microeconomics

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The Market Mechanism 

195_market mechanism.1.png

Features of the equilibrium or market clearing price:

– QD = QS 

– No shortage or scarcity 

– No extra supply price. 

– No pressure on the price to vary 

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The market price is above equilibrium 

– There is much supply 

– Producers decreases prices 

– Quantity demanded increases and quantity supplied reduces 

– The market continuously adjust until the equilibrium price is attained. 

1124_market mechanism2.png

The market price is under equilibrium: 

– There is a scarcity

– Producers increase  prices

– Quantity demanded reduces and quantity supplied continuosly adjust until the new equilibrium price is attained. 

Market Mechanism Summary

 1) Supply and demand communicates to find out the market-clearing price.

 2) When not in equilibrium, the market will arrange to alleviate a scarcity or surplus and revert back the market to equilibrium.

 3) Markets should be competitive for the mechanism to be effective.


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