1.2.6 - price determination Flashcards
What is a free market?
A free market is any place where buyers meet suppliers to exchange goods and services, free from government intervention.
What is market equilibrium?
Market equilibrium is when supply is equal to demand, which occurs at equilibrium quantity and price.
What happens at the market equilibrium?
At market equilibrium, there are no more forces bringing about change, and the quantity supplied equals the quantity demanded.
What is another name for the equilibrium price?
The equilibrium price is also known as the market clearing price.
Why is the equilibrium price called the market clearing price?
It is called the market clearing price because all products supplied are bought, and no buyers are left unable to purchase the good.
What is disequilibrium in a market?
Disequilibrium occurs when market supply and demand are out of balance.
What happens at prices below the equilibrium price?
At prices below equilibrium, the quantity demanded is greater than the quantity supplied, leading to excess demand as there is a shortage
What is the result of excess demand below the equilibrium price?
To eliminate excess demand, prices increase to ration which consumers obtain the product, leading to a contraction in demand and an extension in supply until equilibrium is restored.
What happens at prices above the equilibrium price?
At prices above equilibrium, the quantity supplied is greater than the quantity demanded, leading to excess supply as there is a surplus
What is the result of excess supply above the equilibrium price?
To eliminate excess supply, prices decrease so more consumers demand a certain product, leading to a contraction in supply and an extension in demand until equilibrium is restored.
