Demand is being met, and there are no unsold products, so neither side will have any reason to want to change

How Prices are Determined

As consumers, for many of the things we purchase, price is a very important consideration
We always want to pay the lowest price we can
For suppliers, their decision on whether to supply the market is based heavily on the price that they can obtain
Therefore, price is central to the way in which resources are allocated

The equilibrium price, or clearing price, is where the amount consumers wish to buy and the amount producers wish to put up for sale are equal
In other words, both parties in the market are satisfied
Demand is being met, and there are no unsold products, so neither side will have any reason to want to change

In practise, markets are often unstable and not always in equilibrium
- This is called disequilibrium – demand and supply are not equal
Where this happens, the natural forces in the market result in the market price and output moving to the equilibrium position.
Two cases are:
- Where the price set by producers is too high
  - If the tour operator for holidays thinks that consumers would be willing to pay £400 for a holiday, they will supply 1,100 holidays
  - Consumers, however, at £400, would only want to buy 650, leaving lots of unsold holidays or a surplus
  - This situation cannot persist, so the tour operator is forced to reduce the price of these holidays, to clear the surplus supply

Where the price set by producers is too low
- If the tour operator set prices at £200, consumers would be willing to buy 1,300 holidays
- However, at this price, the tour operator will only be able to provide 900 holidays, creating a shortage
- In this situation, companies looking to maximise profits will see this as an opportunity to raise prices and provide more holidays for the market.
- Prices will rise to the equilibrium price, which will be too high for some consumers, so demand will fall