2.3 competitive market equilibrium

Question 1

Market equilibrium

Answer 1

Condition that holds when a market is clear of any shortage or surplus and the quantity demanded is equal to the quantity supplied

Question 2

Equilibrium price

Answer 2

Point where demand fora product matches the supply of a product at a given time and there is neither excess quantity demanded nor excess quantity supplied

Question 3

Market disequilibrium

Answer 3

Quantity demanded of a product is either higher or lower Tina quantity supplied

Question 4

Shortage

Answer 4

Excess demand

Question 5

Surplus

Answer 5

Excess supply

Question 6

Excess supply

Answer 6

• Price is above market equilibrium
• surplus exists
• higher price means that there is incentive for firms to supply goods but less incentive for consumers to demand them

Question 7

Excess demand

Answer 7

• price is set below market equilibrium
• price is low so consumers are incentivized to buy, but firms aren’t incentivized to produces
• shortage

Question 8

Market equilibrium maintained in shortage

Answer 8

In a market shortage, price will be creased to encourage expansion in quantity supplied + contract demand to restore equilibrium

Question 9

Price mechanism

Answer 9

Means by which the forces of supply and demand determine the allocation of the economy’s scarce resources between competing uses

Question 10

Functions of the price mechanism

Answer 10

1) resource allocation

2) rationing

Question 11

Resource allocation

Answer 11

• prices as a signaling and incentivizing function
• price signals that resources are required where prices rise and that resources are not required where prices fall
• price increases then incentivize firms to allocate more resources there

Question 12

Signaling function associated with

Answer 12

Shifts in the demand or supply curve

Question 13

Incentive function associated with

Answer 13

Movements along the demand curve

Question 14

Rationing function

Answer 14

• Higher prices lead to a lower quantity demanded which serves to preserve or ration scarce products/resources.
• in a market shortage, the price mechanism forces equilibrium price upwards to reduce demand and restore equilibrium

Question 15

Consumer surplus

Answer 15

Gain or benefit to buyers who can purchase a product at a price lower than what they are willing and able to pay

Question 16

Formula for consumer surplus

Answer 16

CS = WTP - market price

Consumer surplus = willing to pay - market price

Question 17

Producer surplus

Answer 17

Gain or benefit to firms who receive a price that is higher than what they are willing and able to supply

Question 18

Formula for producer surplus

Answer 18

PS = P - WTS

Producer surplus = market price - willing to sell

Question 19

Social/ community surplus

Answer 19

Sum of a producer and consumer surplus at a given market price and output, reflective of the total benefit to society from the economic transaction.

Question 20

Social/ community surplus is maximized when:

Answer 20

Price mechanism clears the market of any excess demand or supply

Question 21

Allocative efficiency

Answer 21

Situation where resources are allocated in an optimal way such that consumers and producers both get maximum benefit, and any change in price would leave on worse off than the other. Consumers cannot increase utility and firms can’t gain more revenue or profit.

Question 22

Allocative efficiency is achieved when

Answer 22

Achieved at the price where the marginal benefit and marginal cost of an economic transaction are equal