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Macroeconomics II –The market system

The price mechanism

5.1 Equilibrium

 Equilibrium price set by the interaction of supply and demand

P

D S

P eqm

Q eqm Q

Price higher than equilibrium Price lower than equilibrium

P P
D S D S
S > D
P 1

P 2
D> S

Q Q

Excess supply – producers drop prices Excess demand – shortages force
to clear surplus prices up

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