Exam: Market Equilibrium Flashcards
(27 cards)
What is market equilibrium?
A state in the market where the quantity of a good or service demanded by consumers equals the quantity supplied by producers
What does the market do at equilibrium?
The market stabilises because there is no excess supply (surplus) or excess demand (shortage).
- There’s no pressure for the price to change unless there’s a shift in demand or supply.
Where does equilibrium occur on a model?
- Occurs where the demand curve intersects the supply curve.
What happens the market is not at equilibrium?
When the price is not at equilibrium, shortages or surpluses will occur which will force the market price back to equilibrium
How is a surplus shown on a model?
If the price is above equilibrium price, then this means quantity supplied is above quantity demanded creating a surplus.
How do producers respond to a surplus?
Producers will be left with unsold goods and will reduce price to ‘clear’ the market. This will allow the market price to fall back to equilibrium.
How is a shortage shown on a model?
If the price is below the equilibrium price, then this mean the quantity demanded is below the quantity supplied creating a shortage.
How do consumers respond to a surplus?
Consumers will compete for the limited goods by bidding the price up. This allows the market price to rise back to equilibrium.
What is market clearing?
Refers to the process by which the quantity supplied equals the quantity demanded at a specific price level, known as the market-clearing price or equilibrium price
What happens at the market clearing point?
At this price, there is neither a surplus or a shortage in the market, ensuring that all goods offered for sale are purchased.
What is a shortage?
A shortage occurs when the quantity demanded of a good or service exceeds the quantity supplied at the current market price
When does a shortage happen?
This typically happens when the market is set below the equilibrium price, making the good attractive to consumers but less profitable to produces.
What is a surplus?
- A surplus occurs when the quantity supplied of a good or service exceeds the quantity demanded at the current market price.
When does a surplus happen?
When the market price is set above the equilibrium price, leading to excess supply as producers are willing to sell more at higher prices, but consumers are not willing to purchase at these elevated levels.
How do prices eliminate shortages?
May increase prices to balance supply and demand. Higher prices incentivise producers to supply more and may reduce consumer demand, gradually eliminating the shortage and moving the market toward equilibrium
What is a surplus?
To address a surplus, producers may lower prices to encourage more consumer purchases and reduce the quantity supplied
How do prices eliminate surpluses?
This price adjustment helps eliminate the surplus and restores market equilibrium.
How does an increase in demand affect equilibrium price and quantity?
Increase in demand causes equilibrium price and quantity to increase.
Why may demand increase?
The demand may increase due to a rise in consumer income or an increase in the number of consumers meaning consumers want more of the product and are willing to pay.
How does a decrease in demand affect equilibrium price and quantity
A decrease in demand will cause both equilibrium price and quantity to decrease
Why may demand decrease?
The demand may have increase due to a fall in consumer income or change in preferences meaning consumers have reduce purchasing power or real income and want to purchase less of the product
How do increases supply affect equilibrium price and quantity?
An increase in supply will cause equilibrium price to fall and quantity to increase.
The supply may increase due to a fall in production costs which means producers want to supply more of the product.
How do decreases supply affect equilibrium price and quantity?
A decrease in supply will cause equilibrium price to rise and quantity to decrease.
The demand may decrease due to supply disruptions such as food or an increase in production costs.
Interpret simultaneous shifts in both demand and supply: Demand ↑ and Supply ↑:
- The effect on price = indeterminate
- The effect on quantity = increase
