Market Equilibrium

Question 1

Define market equilibrium.

Answer 1

Market equilibrium refers to the point of ‘market clearing’, where quantity produced = quantity demanded.

This point indicates the idea of market efficiency, in which allocation of resources in a market are efficient.

Question 2

What would occur if price was below market equilibrium? Market inefficiency.

Answer 2

If the price of a product was below market equilibrium, the market would see a shortage.

Why?
1. Increased quantity demanded (because of the reduced price - law of demand).

2. Reduced quantity produced (at which producer’s sell less because of lower prices - law of supply).

Excessive demand for a product in conjunction with minimal supply causes a market shortage.

Question 3

What would occur if price was above market equilibrium? Market inefficiency.

Answer 3

If the price of a product was above market equilibrium, the market would see a surplus.

Why?
1. Reduce quantity demanded (because increased price - law of demand).

2. Increased quantity produced (because increased price - law of supply).

Minimal demand for a product in conjunction with increased supply cases a market surplus.