Market Equilibrium & Disequilibrium Flashcards
(20 cards)
What is a market in economics?
A market is any place where buyers and suppliers meet to exchange goods and services. It can be physical (market stall) or digital (Amazon, eBay).
What is a free market?
A market with no government intervention, where prices and output are determined by supply and demand.
What is market equilibrium?
When quantity demanded = quantity supplied.
What is market disequilibrium?
When demand ≠ supply, leading to either:
Excess demand (shortage), or
Excess supply (surplus)
What happens at the equilibrium price and quantity?
The market clears — all that is supplied is bought, and all that is demanded is available. This is the most efficient allocation of resources.
Why is equilibrium considered allocatively efficient?
Because resources are perfectly allocated to produce goods and services that match consumer demand. No resources are wasted.
Who described markets as naturally self-correcting and efficient?
Adam Smith
What is the price mechanism?
The way prices in a free market automatically adjust to help allocate resources without government intervention.
What acronym explains the functions of the price mechanism?
ARSI:
Allocate resources
Ration scarce goods
Signal changes in market conditions
Incentivise behaviour
How does price allocate scarce resources?
Prices guide producers on where to allocate factors of production based on consumer demand — higher prices signal higher value.
How does price ration scarce resources?
By discouraging consumption when supply is low and prices are high — this helps prevent shortages.
How do prices signal to producers and consumers?
High prices signal excess demand or rising scarcity; low prices signal excess supply or falling demand.
How do prices incentivise producers and consumers?
High prices encourage producers to supply more; low prices encourage consumers to buy more.
What happens in a free market when there is excess demand?
There is a shortage — queues, high competition — and prices naturally rise, moving the market back to equilibrium.
Why is equilibrium considered desirable in a free market?
It achieves allocative efficiency, where resources are used to produce what consumers actually want.
What happens when there’s excess supply?
Prices are above equilibrium, leading to surplus stock (Qs > Qd).
How does the market fix excess supply?
Prices fall, reducing supply and increasing demand until equilibrium is restored.
What does a fall in price signal?
That there are too many resources in that market — a signal to cut production.
How does lower price act as an incentive?
It incentivises firms to reduce output and encourages consumers to buy more.
What is the final result of correcting excess supply?
Market returns to Q* — equilibrium — and achieves allocative efficiency.
