2.3 Equilibrium Flashcards
Market Equilibrium:
The point where the supply curve of a good or service crosses the demand curve, at the price where the quantity demanded equals the quantity supplied.
Equilibrium price / market clearing price
the price at which the quantity demanded of a good is equal to the quantity supplied, so that there are no surpluses or shortages of the good.
Disequilibrium
A state where the quantity supplied does not exactly equal the quantity demanded, due to changes in the external environment. (non-price determinants of demand and supply)
Excess supply / surplus:
When the quantity demanded of a good is less then the quantity supplied. (occurs when price in the market is above equilibrium price)
Increase in demand causes
temporary shortage
Decrease in demand causes
temporary surplus
Supply increase
surplus
Supply decrease
shortage
Price mechanism:
the way in which price changes affect quantity demanded and quantity supplied, thus determining resource allocation in a market
Prices tell us
what, how, and for whom to produce
Negative feedback loops
stabilize systems after a disturbance, and act to bring back equilibrium.
Signalling function of prices:
information is provided to consumers and producers about what should be consumed and produced.
Incentive function of prices:
where financial motivation is provided to consumers and producers to reallocate resources in a market
Rationing:
refers to the controlled distribution of resources
Rationing function:
for whom to produce
