Demand is being met, and there are no unsold products, so neither side will have any reason to want to change

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    How Prices are Determined

    • As consumers, for many of the things we purchase, price is a very important consideration
    • We always want to pay the lowest price we can
    • For suppliers, their decision on whether to supply the market is based heavily on the price that they can obtain
    • Therefore, price is central to the way in which resources are allocated

     

    • The price of any product is determined by demand and supply

     

    • The equilibrium price, or clearing price, is where the amount consumers wish to buy and the amount producers wish to put up for sale are equal
    • In other words, both parties in the market are satisfied
    • Demand is being met, and there are no unsold products, so neither side will have any reason to want to change

     

    • In practise, markets are often unstable and not always in equilibrium
      • This is called disequilibrium – demand and supply are not equal
    • Where this happens, the natural forces in the market result in the market price and output moving to the equilibrium position.
    • Two cases are:
      • Where the price set by producers is too high
        • If the tour operator for holidays thinks that consumers would be willing to pay £400 for a holiday, they will supply 1,100 holidays
        • Consumers, however, at £400, would only want to buy 650, leaving lots of unsold holidays or a surplus
        • This situation cannot persist, so the tour operator is forced to reduce the price of these holidays, to clear the surplus supply

     

    • When supply is greater than demand, price will fall

     

    • Where the price set by producers is too low
      • If the tour operator set prices at £200, consumers would be willing to buy 1,300 holidays
      • However, at this price, the tour operator will only be able to provide 900 holidays, creating a shortage
      • In this situation, companies looking to maximise profits will see this as an opportunity to raise prices and provide more holidays for the market.
      • Prices will rise to the equilibrium price, which will be too high for some consumers, so demand will fall

     

    • When demand is greater than supply, price will rise

     

     

     

     

     

     

     

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