Question

From what you have learned, describe the role of buyers and sellers in determining market clearing price. Provide "real life" scenarios and examples.

Answer 1

Answer:

Buyers try to minimize what they spend by buying at the lowest price and not purchasing if the price is too high. Because of this we have the law of demand in which quantity demanded decreases as price increases. On the other hand, sellers try to maximize their earnings by increasing quantity supplied as high as price allows (the law of supply states that as price increases, so does quantity supplied). The price in which the two parties compromise is the market clearance price.

Now lets look at the price of bubble gum, an elastic good. When sellers list this product at a higher price they are more willing to supply more products to their buyers. Buyers however will respond to an increase in price with a decrease of bubble gum purchases. These two counteracting parties set a limit on the price of gum and the quantity supplied. This illustrates the concept of the invisible hand driving the market to find the clearance price, or equilibrium, of bubblegum.