3. Market equilibrium, price mechanism, market efficiency Flashcards Preview

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Flashcards in 3. Market equilibrium, price mechanism, market efficiency Deck (12)
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1
Q

Define equilibrium

A

EQUILIBRIUM: state of rest, self-perpetuating in the absence of any outside disturbance

2
Q

Point of equilibrium

A

Makret is at equilibrium at price Pe because quantity Qe is both demanded nad supplied

Pe- market clearing price - evry product will be sold for that price

3
Q

How excess supply is created

A

If producers try to raise price above Pe - quantity demanded falls while quantity supplied increases - excess suply of Q1-Q2

Price must be lowered - back at equilib

4
Q

How excess demand is created

A

Suppliers lower the price below Pe - quantity demanded rises above quantity supplied - excess demand of Q3-Q4

To eliminate shortage - producers need to raise prices - equilibrium

5
Q

Creating new equilibrium

A

Demand/supply changes due to non-price determinants - curve shifts - new equilibrium establishe

6
Q

Define price mechanism

A

PRICE MECHANISM: the forces of demand and supply

7
Q

Price mechanism in resource allocation

A

Price mechanism helps allocate scarce resources - increase in price - increase in demand - signals to produce more of that product - more resources into those goods

Invisible hand in the economy moving factors of production to allocate resources

8
Q

What determines market efficiency

A
  1. Consumer - producer surplus
  2. Allocative efficiency
9
Q

Explain consumer - producer surplus

A

CONSUMER: willing to pay 15$ for Qe thingies - paid lower price Pe - gained

PRODUCER: willing to sell for 1$ but receives 10$ - gained

10
Q

Define consumer surplus

A

CONSUMER SURPLUS: extra satisfaction/utility gained by consumer from paying a price that is lower than that which they are prepared to pay

11
Q

Define producer surplus

A

PRODUCER SURPLUS: excess of actual earnings that a producer makes from a given quantity of output, larger than the amount the producer would be willing to accept for that output

12
Q

Define allocative efficiency

A

ALLOCATIVE EFFICIENCY (or socially efficient): a state of a market when it operates at equilibrium witho no external effects nor influences

From scociety’s point of view - resources allocated efficiently - at equilibrium community surplus (total benefit to society) maximised

Free market leads to allocative efficiency