Market Equilibrium and Price Elasticity

Question 1

What is a price mechanism?

Answer 1

Is the process by which the forces of supply and demand interact to determine the market price at which goods and services are sold and the quantity produced.

Question 2

What is the market equilibrium?

Answer 2

Certain price level the quantity supplied and the quantity demanded of a particular commodity are equal

Question 3

What is equilibrium?

Answer 3

Is achieved in an individual market when any consumer who is willing to pay the market price for a good or service is satisfied and any producer who offers their goods or services at the market price is able to sell their products. It occurs in the quantity demanded is equal to the quantity supplied that is when the market clears.

Question 4

When does market equilibrium occur?

Answer 4

1. Quantity demanded = quantity supplied
2. The market clears
3. There is no tendency to change

Question 5

What happens when the quantity supplied exceeds the quantity demanded?

Answer 5

The sellers will offer to sell at a lower price they’ll be an expansion in demand and a contraction in supply

Question 6

What happens when the quantity demanded exceeds the quantity supplied?

Answer 6

The consumers will start bidding of the price and there will be an expansion in supply and a contraction in demand.

Question 7

What causes a change in equilibrium?

Answer 7

A shift in demand or supply

Question 8

Price elasticity of demand

Answer 8

Measures the responsiveness of the quantity demanded to change in price.

% change in QD (divided) by % change in price

Question 9

Elastic Demand

Answer 9

Strong response to change in price

Question 10

Unit elastic demand

Answer 10

Amount spent by consumers stays constant

Question 11

Inelastic demand

Answer 11

Weak response to price change

Question 12

Price elasticity of demand effect on business

Answer 12

1. decide on the optimal pricing strategy
2. whether or not the change the price

Question 13

Price elasticity of demand effect on government

Answer 13

1. Pricing goods/services for the community
2. predict the effects of changes in any indirect taxes
3. accurately estimate the amount of revenue

Question 14

Outlay method and equation

Answer 14

Price up = Revenue up = inelastic
Price up = Revenue down = elastic
Price up = Revenue same = unit elastic

Price (x) demand

Question 15

Perfectly Elastic Demand

Answer 15

Horizontal straight line
Consumers will demand infinite quantities at the same price

Question 16

Perfectly inelastic Demand

Answer 16

Vertical straight line
Consumers are willing to pay any price in order to obtain a given quantity of a good or service.

Question 17

Price Elasticity of Supply

Answer 17

Measures the responsiveness of quantity supplied to a change in price.

% change in QS (divided) by % change in price

Question 18

What will happen if there is an increase in price?

Answer 18

There will be an expansion in the supply meaning for most goods the price elasticity of supply is positive

Question 19

Elastic supply

Answer 19

Increase in QS is bigger than increase in price

Question 20

Inelastic supply

Answer 20

Decrease in QS is less than a decrease in price

Question 21

Unit Elastic supply

Answer 21

The increase in QS is the same portion

Question 22

Inelastic supply

Answer 22

A decrease in quantity supplied is less than an decrease in price

Question 23

Perfectly elastic supply

Answer 23

• Straight horizontal line
• Supply an infinite quantity of good
• Below the price the supplier will not be willing to supply anything

Question 24

Perfectly inelastic supply

Answer 24

• Straight vertical line
• Quantity supplied is fixed regardless of price
• e.g. one of a kind

Question 25

5 ways the price mechanism affect the market

Answer 25

1. Solving the economic problem - product markerts 2. Producing what consumers demand 3. Factor markets 4. Allocative efficiency 5. Competition

Question 26

Product market

Answer 26

Interaction of demand and supply for outputs of production

Question 27

Why do governments intervene?

Answer 27

The market price for goods/services in product markets may be too high or too low Therefore, the equilibrium quantity may also be too high to too low

Question 28

Market failure

Answer 28

Occurs when the price mechanism takes into account private benefits and costs of production to consumers and producers, but it fails to take into account indirect costs / social costs

Question 29

Process of market failure

Answer 29

Do not produce desired outcomes (because the price mechanism takes account of the private costs) BUT NOT THE SOCIAL COST AND BENEFITS Which then the government must intervene

Question 30

What does price intervention always lead to?

Answer 30

1. Markert disequilibrium 2. Excess in demand or supply 3. A distribution of income

Question 31

Outline price ceiling

Answer 31

The maximum price that can be charged for a particular commodity - it is a price intervention - Redistributes money from sellers to buyers - The price of some items is too high - Excess in demand

Question 32

Outline price floor

Answer 32

The minimum price that can be charged for a particular commodity - it is a price intervention -Redistributes money from buyers to sellers - The price of some items is too low - Excess in supply

Question 33

Public goods

Answer 33

Are good that private firms are unwilling to supply, as they are not able to restrict usage and benefits to those willing to pay for the good. Because of this government should provide these goods.

Question 34

Merit goods

Answer 34

are goods that are not produced in sufficient quantity by the private sector because private individuals do not play sufficient value on those goods that is they both positive externalities that I'm not fully enjoyed by the individual consumer. Merit goods include education and healthcare

Question 35

Positive externalities

Answer 35

Individual consumers do not consider the social benefits this includes museums, public parks and transport - quantity intervention

Question 36

Why might quantity be too high/low

Answer 36

Individual business firms and individual consumers do not consider the social costs/benefits of the production and consumption of certain goods/services - these are externalities

Question 37

What is an externality?

Answer 37

Externalities are external costs and benefits that private agents in a market do not consider in their decision-making process.

Question 38

What do and don't markets consider?

Answer 38

Markets consider the economic and social concerns and individual sellers and buyers Do not consider the side effects that are directly reflected in the price mechanism (fails to represent the social costs or benefits of production)

Question 39

Example of a positive and negative externality

Answer 39

POSITIVE: Cleaning up the plastic in an area as it benefits the whole public when visiting NEGATIVE: 1. Loss of biodiversity because of land clearing from mining 2. Soil erosion and increase soil salinity because of forestry and farming practices

Question 40

Outline a pure competition

Answer 40

Many firms, very small Homogeneous product No barriers to entry Theoretical

Question 41

Outline a Monopoly

Answer 41

One firm only, generally large No close substitutes Extremely high barriers to entry Example water supply Price setters Opposite to pure market

Question 42

Outline a Monopolistic competition

Answer 42

Many firms, relatively small Differentiated products Relatively easy entry Example motels, restaurants

Question 43

Outline an Oligoply

Answer 43

A few relatively large firms Usually differentiated products High barriers to entry Examples are supermarkets, banks, oil companies, airlines

Question 44

Are the four market structures are they perfectly imperfect

Answer 44

Pure competition – perfect Oligopoly - imperfect Monopolistic competition - imperfect Monolpy - perfect