Market Equilibrium and Interrelated Markets Flashcards
What is the free market?
It is any place where buyers meet suppliers to exchange goods and services, free from government intervention
When does equilibrium occur and what does it represent?
It occurs when D=S
It represents allocative efficiency where firms are following consumer demand
Why will disequilibrium never last?
where theres excess demand/supply
This is due to the price mechanism
1) Signals that price is too high/low
2) Incentivises producers to change price and increase profits
3) Rations excess demand and supply
4) Allocates scarce resources efficiently
What is joint demand? (complements)
This refers to 2 items normally brought together so if demand for 1 increases then demand for the other will also increase.
What is competitive demand? (substitutes)
This refers to 2 items that serves the same purpose.
If the price of 1 goes up, then the demand for the other will increase.
What is derived demand?
This is where the demand for a good/service comes from the demand of something else.
EG: cars and metals
What is composite demand?
It refers to two goods which need the same input to make them.
An increase in demand for one will lead to a fall in supply of another.
EG: milk which can make cheese or butter.
If the demand for cheese increases, then more milk will be used here. As a result, the supply for butter falls.
What is joint supply?
This is where an increase in production of one good will increase the supply of another.
EG: Crude oil and petroleum
