👨‍🏫 Notes on E-1000 Lecture 3

At an equilibrium, Q^D = Q^S. Everything that is produced (Q^S) is purchased by someone (Q^D). We say that “markets clear”

Why do we expect markets to be in equilibrium?

We believe that the market price will always go to the equilibrium price, P*. Why is that?

Well, suppose P > P*. Then there will be a surplus, and some suppliers will drop their prices in order to sell all of their goods. The price will drop until P=P*.

Now, suppose P < P*. Then, there will be a shortage, and some consumers will be willing to pay more in order to get the good. The price will rise until P=P*

Basically, if P≠P*, P will adjust until P=P*.

Finally, once P=P*, then Q^D = Q^S, so the market will be in equilibrium. We say that “markets clear.”