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the essentials of demand and supply
increase in the number of firms producing the good, for example, will result in a shift of the supply curve to the right. Market equilibrium exists when the quantity supplied is equal to quantity demanded. The price that equates quantity supplied with quantity demanded is called the equilibrium price. If the price rises above the equilibrium price, the quantity supplied will exceed the quantity demanded, resulting in a surplus (excess supply). If the price falls below the equilibrium price, quantity demanded will exceed the quantity supplied, resulting in a shortage (excess demand). An increase or a decrease in price to clear the market of a surplus or a shortage is referred to as the rationing function of prices.The rationing function is considered to be a short-run phenomenon. In the short run, one or more explanatory variables are assumed to be constant. A price ceiling is a government-imposed maximum price for a good or service produced by a given industry. Price ceilings create market shortages that require a non–price rationing mechanism to allocate available supplies of goods and services. There are a number of non-price rationing mechanisms, including ration coupons, queuing, favored customers, and black markets. The allocating function of price, on the other hand, is assumed to be a long-run phenomenon. In the long run, all explanatory variables are assumed to be variable. In the long run, price changes signal consumers and producers to devote more or less of their resources to the consumption and production of goods and services. In other words, the allocating function of price allows for changes in all demand and supply determinants.
KEY TERMS AND CONCEPTS Allocating function of price The process by which productive resources are reallocated between and among production processes in response to changes in the prices of goods and services. Change in demand Results from a change in one or more demand determinants (income, tastes, prices of complements, prices of substitutes, price expectations, income expectations, number of consumers, etc.) that causes an increase in purchases of a good or service at all prices. An increase in demand is illustrated diagrammatically as a right-shift in the entire demand curve. A decrease in demand is illustrated diagrammatically as a left-shift in the entire demand curve. Change in supply Results from a change in one or more supply determinants (prices of productive inputs, technology, price expectations, taxes and subsidies, number of firms in the industry, etc.) that causes an increase in the supply of a good or service at all prices. An increase in supply is illustrated diagrammatically as a right-shift in the entire supply curve. A decrease in supply curve is illustrated diagrammatically as a leftshift in the entire supply curve.
