Unit 2.3: Competitive Market Equilibrium

Question 1

Market Equilibrium

Answer 1

When the quantity demanded for a product is equal to the quantity supplied.
(There are no shortages or surpluses.)

Question 2

Incentive function

Answer 2

Price changes provide a motivation for producers and consumers to change their behaviour in order to maximise their benefits

Question 3

Signalling function

Answer 3

An aspect of the price mechanism in allocating resources by providing information to producers and consumers where resources are required (in markets where prices increase) and where they are not (in markets where prices fail)

Question 4

Rationing function

Answer 4

Deters some consumers from buying a product or resource owing to higher prices, thereby rationing (preserving) it. Scared resources are rationed when demands for a product exceed supply

Question 5

Surplus

Answer 5

Created when the supply of a product exceeds its demand because the price is set higher than the market equilibrium price. (Qs > Qd)

Question 6

Shortage

Answer 6

When the demand of a product exceeds its supply because the price is set lower than the market equilibrium price. (Qd > Qs)

Question 7

Consumer surplus

Answer 7

The difference between the maximum price consumers are willing to pay and the price they actually pay

Question 8

Producer surplus

Answer 8

the difference between the minimum price producers are willing to accept to produce a good and the price they actually sell at

Question 9

Social surplus

Answer 9

The summation of consumer and producer surplus

Social surplus is maximised when market is at equilibrium, state of allocative efficiency

Question 10

Allocative efficency

Answer 10

The optimal allocation of resources according to society’s point of view.

Question 11

Welfare loss

Answer 11

Total surplus is not maximised.

Welfare loss = “lost” social surplus