The Market Mechanism
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
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.
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.