Market equilibrium (ME 8.1-8.4

Question 1

Market equilibrium

Answer 1

where at a certain price level, q(d) and q(s) of a particular commodity are equal
- meaning that the market is cleared
- no tendency for change in either price or quantity because the forces of supply and demand are balanced
- allocative efficient assuming no market failure

Question 2

how do sellers deal with excess supply?

Answer 2

lower price

Question 3

fall in price results in…

Answer 3

contraction in supply and expansion in demand

Question 4

When does the market clear?

Answer 4

when the quantity demanded is equal to the quantity supplied
- plans of buyers and sellers are realised- no one goes home unsatisfied
- no tendency for change
- allocatively efficient

Question 5

Under what assumptions do we analyze the concept of equilibrium?

Answer 5

1. No government intervention
2. We have pure competition in the marketplace-> no one can set price

Question 6

The price mechanism is

Answer 6

the process by which supply and demand interact to determine the market price that good/ service is sold and the quantity produced

Question 7

What is the equilibrium?

Answer 7

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 product.
- occurs when quantity demanded= quantity supplied, when market clears

Question 8

How does the market self adjust when the quantity demanded exceeds the quantity supplied?

Answer 8

• competition among consumers for limited goods and services will cause them to start bidding up the price
• rise in price result in contraction of demand and expansion in supply-> movement on graph towards equilibrium point
• continues to occur until the equilibrium price is reached

Question 9

How does the market self adjust when the quantity supplied exceeds the quantity demanded?

Answer 9

• situation of excess supply/ glut in the market
• sellers will sell at a lower price to remove excess products
• fall in price results in expansion in demand and contraction in supply
• continues until the equilibrium point is reached

Question 10

In which market does the price mechanism attempt to solve the economic problem?

Answer 10

product market

Question 11

What plays the most important role in determining the solutions to the economic problem and how?

Answer 11

• the price mechanism
• it conveys important information that helps provide answers to questions about the production, distribution and exchange of goods and services in the economy
• the interaction of demand and supply determines a price and quantity that best satisfies the sellers and consumers, giving a solution to the economic problem facing all economies

Question 12

What kind of goods do producers selectively produce and how?

Answer 12

• only produce g&s with consumer demand
• increasing demand for product X will be translated into a higher market price–> signals producers to reallocate resources away from other areas of production to produce product X
• information about taste and preferences is conveyed between the two through relative price changes without need to obtain information directly from consumers

Question 13

How does the price mechanism play a major role in the factor market?

Answer 13

Individuals who possess resources/ skills or produce goods and services that are scarce and in high demand will command higher incomes and greater proportion of total output.

Question 14

Allocative efficiency

Answer 14

the economy’s ability to allocate resources to satisfy consumer wants.

Question 15

Why is the price mechanism efficient?

Answer 15

• any consumer willing to pay the market price for a g&s will be satisfied
• any producer offering g&s at the market price will be able to sell what they produce
• ensures that equilibrium is reached at the intersection of those two curves

Question 16

How does competition ensure the most efficient use of resources?

Answer 16

• ensures that producers are responsive to consumer demand
• and attempt to minimise their costs of production
• to remain competitive in the market and maintain their profitability
• ensures use of most cost-efficient methods of production

Question 17

When markets do not produce desired outcomes it is called…

Answer 17

market failure

Question 18

Why does market failure occur?

Answer 18

Because the market takes into account factors like private costs and benefits but fails to take into account other factors like social costs and benefits, e.g. environmental damage.

Question 19

price ceilings

Answer 19

the maximum price that can be charged for a particular commodity, has to be below equilibrium price

Question 20

price floors

Answer 20

the minimum price that can be charged for a particular commodity, has to be above equilibrium price

Question 21

what is the main reason for the government influencing prices?

Answer 21

• to affect the distribution of income
• price ceilings redistribute money from sellers to buyers while price floors redistribute money from buyers to sellers

Question 22

E.g. q.
the government considers the price of wheat to be too low and imposes a price floor above Pe, what is the result of this?

Answer 22

• as wheat is a commodity that is an important source of income for many farmers
• increases price of wheat
• resulting in disequilibrium of market
• with an excess supply of wheat

Question 23

Why are governments less keen on using price intervention to intervene market?

Answer 23

• as it causes disequilibirum
• causing over-production/ under-production of products

Question 24

How can the government possibly limit negative externalities?

Answer 24

• using law-> safety regulations/ pollution emission permits
• taxes-> increases production costs and reduce production levels

Question 25

What is the phrase for “the government making businesses pay for the social costs formed in production”?

Answer 25

• internalising the externality

Question 26

problem:
market price too high
market price too low
market quantity too high (negative externalities)
market quantity too low (positive externalities)
market does not provide good or service (public goods

determine the government action and outcome for each of these problems.

Answer 26

government action:
price ceiling
price floor
taxes
subsidies
government provides good or service

outcome:
- reduces price, quantity shortage (diseq
- increases price, quantity excess (diseq
- increases equilibrium price, reduce equilibrium quantity
- reduces equilibrium price, increases equilibrium quantity
- government must collect taxation revenue to finance its supply of public goods

Question 27

merit goods

Answer 27

goods that aren’t produced in sufficient quantity by the private sector because private individuals do not place sufficient value on those goods.
- involve positive externalities not fully enjoyed by the individual consumer

Question 28

public goods

Answer 28

• goods that private firms are unwilling to supply as they are not able to restrict usafe and benefits to those willing to pay for the good
• therefore government provides them

Question 29

monopolistic competition

Answer 29

many small firms in the industry

Question 30

oligopoly

Answer 30

a small number of large firms dominate the industry

Question 31

monopoly

Answer 31

only one producer in the industry

Question 32

monopolistic competition

Answer 32

many small firms in the industry

Question 33

key parts of the key functions of the price mechanism

Answer 33

Allocate: allocating scarce resources among competing uses
Rationing: ratio the scarce resources when market demand outstrips supply
Signalling: price adjusts to demonstrate where resources are required and where they are not
Incentives- when the price of a product rises, the quantity supplied increases as businesses respond

Question 34

which of price ceiling and price floor are price support schemes and price ceiling schemes?

Answer 34

price ceiling- price control schemes
price floor- price support schemes