free-market equilibrium price

(noun)

The price established through competition such that the amount of goods or services sought by buyers is equal to the amount of goods or services produced by sellers

Related Terms

Examples of free-market equilibrium price in the following topics:

  • Price Floor Impact on Market Outcome

    • A price floor will only impact the market if it is greater than the free-market equilibrium price.
    • A price floor will also lead to a more inefficient market and a decreased total economic surplus.
    • Producer surplus is the amount that producers benefit by selling at a market price that is higher than the least they would be willing to sell for.
    • An effective price floor will raise the price of a good, which means that the the consumer surplus will decrease.
    • If a price floor is set above the free-market equilibrium price (as shown where the supply and demand curves intersect), the result will be a surplus of the good in the market.

  • Introduction to Deadweight Loss

    • In a perfectly competitive market, products are priced at the pareto optimal point.
    • where the supply and demand curve intersect, otherwise known as the free market equilibrium;
    • The chart above shows what happens when a market has a binding price ceiling below the free market price.
    • Without the price ceiling, the producer surplus on the chart would be everything to the left of the supply curve and below the horizontal line where y equals the free market equilibrium price.
    • The consumer surplus would equal everything to the left of the demand curve and above the free market equilibrium price line.

  • Price Ceiling Impact on Market Outcome

    • A price ceiling will only impact the market if the ceiling is set below the free-market equilibrium price.
    • This is because a price ceiling above the equilibrium price will lead to the product being sold at the equilibrium price.If the ceiling is less than the economic price, the immediate result will be a supply shortage.
    • A price ceiling will also lead to a more inefficient market and a decreased total economic surplus.
    • Prolonged shortages caused by price ceilings can create black markets for that good.
    • If a price ceiling is set below the free-market equilibrium price (as shown where the supply and demand curves intersect), the result will be a shortage of the good in the market.

  • Price Ceilings

    • These regulations require a more gradual increase in rent prices than what the market may demand.
    • By definition, however, price ceilings disrupt the market.
    • By setting a maximum price, any market in which the equilibrium price is above the price ceiling is inefficient.
    • For a price ceiling to be effective, it must be less than the free-market equilibrium price.
    • It is also the price that the market will naturally set for a given good or service.

  • Price Floors

    • For a price floor to be effective, it must be greater than the free-market equilibrium price.
    • It is also the price that the market will naturally set for a given good or service.
    • If the price floor is lower than what the market would already charge, the regulation would serve no purpose.
    • Since the price is set artificially high, there will be a surplus: there will be a higher quantity supplied and a lower quantity demanded than in a free market .
    • If a price floor is set above the equilibrium price, consumers will demand less and producers will supply more.

  • Thinking about Efficiency

    • It is subject to what Adam Smith described as the invisible hand: if the price is anything except the equilibrium price, market forces will eventually return the market price to equilibrium .
    • Not all markets are efficient.
    • There are a number of reasons why a market may be inefficient.
    • Governments can institute any number of policies that prevent markets from achieving the free market equilibrium price and quantity: taxes raise prices, quotas limit the quantity sold, and regulations affect the supply and demand curves.
    • Consumer and producer surplus are maximized at the market equilibrium - that is, where supply and demand intersect.

  • The Function and Nature of Markets

    • In a free market, the price and quantity of an item are determined by the supply and demand for that item.
    • In a free market, the price and quantity of an item is determined by the supply and demand for that item.
    • This is not the equilibrium price because at $1,200, supply exceeds demand.
    • Changes to the market supply and market demand will cause changes in the equilibrium price and quantity of the good produced.
    • The new market equilibrium will have a higher number of cars sold at a lower price.

  • Profits in Long Run Pure Competition

    • There is no reason to lower their price below the market price because they can sell all they want to a the market price.
    • Given thess demand and supply functions, the market equilibrium is at point EM resulting in an equilibrium price (PEM) and quantity (QEM).
    • The equilibrium quantity in the market rises but there are more firms.
    • The demand function faced by the firm is perfectly elastic at the equilibrium price established in the market.
    • Secondly, entry and exit from the market is relatively free.

  • The Demand Curve in Perfect Competition

    • A perfectly competitive firm faces a demand curve is a horizontal line equal to the equilibrium price of the entire market.
    • Individual firms are forced to charge the equilibrium price of the market or consumers will purchase the product from the numerous other firms in the market charging a lower price (keep in mind the key conditions of perfect competition).
    • The demand curve for an individual firm is thus equal to the equilibrium price of the market .
    • The demand curve for a firm in a perfectly competitive market varies significantly from that of the entire market.The market demand curve slopes downward, while the perfectly competitive firm's demand curve is a horizontal line equal to the equilibrium price of the entire market.
    • The demand curve for an individual firm is equal to the equilibrium price of the market.

  • Clearing the Market at Equilibrium Price and Quantity

    • When a market achieves perfect equilibrium there is no excess supply or demand, which theoretically results in a market clearing.
    • Through effectively controlling the diamond market supply (via owning the mines), and warehousing the diamonds in a way to substantially alter the available supply, it became reasonably easy for Da Beers to charge prices in excess of what a reasonable equilibrium would be.
    • Combining these two assumptions, in a perfectly competitive market the amount of a product or service that is supplied at a given price will equate to the amount demanded, clearing the market of all goods/services at a given equilibrium point.
    • Even in static markets there is competitive consolidation that allows companies to charge differing price points than that of the equilibrium.
    • The equilibrium point is where market clearing will theoretically occur.