2.3 competitive market equilibrium

Question 1

market equilibrium

Answer 1

in a market, this occurs at the price where the quantity of a product demanded is equal to the quantity supplied. This is the market clearing price since there is no excess demand or supply.
Qd=Qs

Question 2

Qs>Qd
Qs=Qd
Qs<Qd

Answer 2

Qs>Qd = excess demand = price rises = not equilibrium
Qs=Qd = market clears = no tendency for price change = equilibrium
Qs<Qd = excess supply = the price falls = equilibrium

When a market is in equilibrium, quantity demanded equals quantity supplied, there is no tendency for the price to change. Market equilibrium is determined at the intersection of the demand and supply curve, the price in market equilibrium is the equilibrium rice, and the quantity is the equilibrium quantity.

Question 3

explain excess demand

Answer 3

or a shortage,
at P1, If there is more quantity demanded than supplied, the price will not remain constant and will increase. The effect of excess demand / shortage is to create a tendency for the price to increase ( to drive the price upwards ) and since there is a tendency for the price to change, the original price cannot be the price that will prevail in the market.

Question 4

equilibrium price

Answer 4

the price that is set by the interaction between consumers and producers in markets where there are no surpluses or shortage and the market has cleardd

Question 5

disequilibrium:

Answer 5

A state where quantity demanded does not exactly equal quantity supplied, due to changes in the external environment (non-price determinants of demand and supply).

Question 6

price mechanism

Answer 6

the system where the forces of demand and supply determine the prices of products. also known as the market mechanism

Question 7

negative feedback loop

Answer 7

A change in a system that counteracts any movement away from equilibrium and promotes stability.
(move tw equilibrium)

Question 8

positive feedback loop

Answer 8

A change in a system that leads to more and greater change away from an equilibrium, destabilising the system.
(away from equilibrium)

Question 9

functions of price(3 + purpose)

Answer 9

rationing, signalling, incentive functions
rationing: The function of the price mechanism where the economic question of ‘for whom’ is determined

signalling: The function of the price mechanism where information is provided to consumers and producers about what should be consumed and produced.

incentive: The function of the price mechanism where motivation is provided to consumers and producers to reallocate resources in a market.

Question 10

pareto optimality (not tested ahahh)

Answer 10

A state of allocation of resources from which it is impossible to reallocate so as to make any one individual or preference criterion better off without making at least one individual or preference criterion worse off.

Question 11

social/community surplus

Answer 11

consumer surplus + producer surplus:
the total benefit gained by society when the mkt is at equilibrium

Question 12

consumer surplus

Answer 12

difference between the price consumers pay and the price they are willing to pay

Question 13

producer surplus

Answer 13

the benefit enjoyed by producers by receiving a price that is higher than the price they are willing to receive

Question 14

assumptions about goals of consumer/producer behaviour

Answer 14

consumer -> maximise utility
producer -> maximise profits