MGEB02H3 Chapter Notes - Chapter 2: Market Clearing, Shortage
24 Jun 2018
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I) The Market mechanism
1) Equilibrium
The two curves intersect at the equilibrium, or market clearing price, the price that
equates the quantity supplied and the quantity demanded. the market mechanism is
the tendency in a free market for the price to change until the market clears,
meaning until the supply and demand are equal. Reaching this point, because there is
neither excess demand or excess supply, there is no pressure for prices to change. All
markets eventually clear, some might take more time for them to adjust but the
tendency is for them to clear.
When we use the supply-demand model we implicitly assume that we are referring to
a competitive market with no monopoly.
2) Elasticity of supply and demand
Elasticity measures the sensitivity of one variable to another. It is a number that
tells us
the percentage change that will occur in one variable in response to a 1-
percent increase in another variable.
For instance, the price elasticity of demand
measures the sensitivity of quantity demanded to price changes. It tells us what the
% change in the quantity demanded for a good will be following a 1-percent increase in
the price of that good.
a) Price elasticity of demand
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Document Summary
Reaching this point, because there is neither excess demand or excess supply, there is no pressure for prices to change. All markets eventually clear, some might take more time for them to adjust but the tendency is for them to clear. When we use the supply-demand model we implicitly assume that we are referring to a competitive market with no monopoly. Elasticity measures the sensitivity of one variable to another. It is a number that tells us the percentage change that will occur in one variable in response to a 1- percent increase in another variable. For instance, the price elasticity of demand measures the sensitivity of quantity demanded to price changes. % change in the quantity demanded for a good will be following a 1-percent increase in the price of that good. We write the price elasticity of demand, ep, as: Where (%q) means taux de variation de la demande .
