The concept of market equilibrium and equilibrium prices. The pricing mechanism in the market economy.

The point where the demand curve and the supply curve cross each other at the demand-and-supply diagram is the equilibrium point. Market equilibrium is the characteristic of market conditions - commodities quantities and prices, when quantity demanded is equal to quantity supplied. They are reflected in information provided by market - commodities prices. Economic agents - both sellers and buyers - use this information for decision making about their behavior. If initial market conditions are equilibrium conditions, they would not be changed (would be the same) at the next step, ceteris paribus. As a result, the equilibrium situation can be characterized as a realization of all decisions made.

The value PE is called equilibrium price, if the quantity of commodity demanded under this price is equal to the quantity of commodity supplied. As figure 3.1 shows, the equilibrium point exists and it is unique for demand-and-supply diagram. The demand curve DD and the supply curve SS at the figure 1 cross each other at point E with coordinates (QE, PE).

Law of uniform (one) price: A homogeneous good trades at the same price no matter who buys it or which firm sells it.

When a market price P deviates from equilibrium price PE (or a quantity of a good Q deviates from equilibrium quantity QE) an excessive supply or excessive demand is formed at a market.

Shortage (or an excess demand): The difference between quantity demanded and quantity supplied in a market when quantity demanded is greater than quantity supplied (Fig. 3.2, P2< PE).

Surplus (or an excess supply): The difference between quantity supplied and quantity demanded in a market when quantity supplied is greater than quantity demanded (Fig.3.2, P1> PE).

Changes in demand and supply in the market generate changes in equilibrium situation.

a) An increase in market demand (represented by an outward shift in the demand curve D 0 D 0) increases both the equilibrium price PE and equilibrium quantity QE. (Fig.3.3a)

b) If market demand falls (this is represented by inward shift in the demand curve D 0 D 0), both equilibrium price and equilibrium quantity fall. (Fig.3.3b)

c) If the market demand rises (the demand curve S0S0 moves outward), the equilibrium price falls and the equilibrium quantity rises. (Fig.3.3c)

d) Decrease in market supply (represented by inward shift in the supply curve) moves the equilibrium price up and equilibrium quantity down. (Fig.3.3d)

e) The simultaneous changes in demand and supply can move equilibrium price and quantity in various directions, as figures above show.

3. Organizational and legal forms of entrepreneurship. The classification of firms and their role in the economy.