2.3 market equilibrium

Question 1

Equillibrium

Answer 1

Equilibrium is when quantity supplied is equal to quantity demanded. THere is no surplus or shortage.

there is no surplus or shortage

Question 2

Disequilibrium

Answer 2

There is a surplus or shortage of supply.

Question 3

Surplus

Answer 3

there is excess supply
- QS>QD
-price>equillibrium

producers lower the price so more consumers buy more to rid of excess

Question 4

Shortage

Answer 4

there is excess demand
- QS<QD
-price<equilibrium

producers raise price so that less consumers demand

Question 5

CHnages in market equillibrium

Answer 5

Shifts of demand:
- increase demand= increase scarcity of good
- decrease demand= decrease in scarcity of good

Shifts of supply:
- Supply increases= good becomes less scarce
- supply decereases= good becomes more scarce

Question 6

Price system signal scarcity

Answer 6

Price system control resource allocation

• most scarce= low supply relative to demand (highest price)
• least scarce= lowest demand relative to supply(lower prices)

competitive markets= buyers and sellers agree on the appropriate market price

Benefits of competitive markets= efficiently rationalig of resource through price system:
- buyers concourse of time and income levels
- suppliers watch closely their costs and selling potential of goods.

Question 7

price system influence incentives

Answer 7

change in price= producers and consumer incentives changed

• price increases consumers use it less
• price decreases consumer use it more.

Question 8

Competative markets reaching efficency

Answer 8

Consumer surplus: benfits consuemrs gain from buying products lower then willing to buy

calculating consumer surplus from diagram:
(b x h)/2

producer surplus: benefits producers gets from selling product at higher price then willing to sell.

community/social surplus: producer and consumer surplus= community surplus

Question 9

Allocative efficency and competative markets

Answer 9

allocative efficency= society producers enough of goods/service so that marginal benifits= marginal costs

allocative efficency= community surplus at max

loss of surplus= deadweight loss

deadweigthloss is the amount everyone gets from there being a shortage or surplus.