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More on Markets (Unit 2 Contd.) September 23, 2008

Posted by petrarcanomics in More Markets & Elasticity.
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Markets arrive at equilibriums of quntity demanded and quantity supplied, setting a market price and quantity. When quantity demanded is greater than quantity supplied markets experience shortage and inventories are low. They generally move back to equilibrium by raising price to elimintate that shortage.

When quantity supplied is greater than quantity demanded, markets experience a surplus, and inventories are high. Markets generally lower price in order to alleviate the surplus and move back to equilbrium.

Sometimes market mechanisms are not allowed to work when government imposes price ceilings and price floors.

Price ceilings are government mandated maximum limits on the price of a particular good. If these are set below equilibrium price they will create shortages. Above equilibrium price, a price ceiling is of no consequence as the equilibrium price will allocate the quantity supplied of a good.

Price floors are a government imposed minimum limit on prices which does not allow producers to charge any price below the floor price. Floors imposed above equilibrium will create surpluses. Price floors below equilibirum are of no consequence as the equlibirum price will allocate the quantity supplied of a good.

For more information on shortages, surpluses, and price floors and ceilings, see Reffonomics.

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