2.4 Competitive market equilibrium

Question 1

When will there be a surplus or excess supply?

Answer 1

at a price above the equilibrium price, the quantity supplied will exceed the quantity demanded of the good, leading to excess supply (surplus)

Question 2

What will happen when there is a surplus of supply

Answer 2

a surplus will lead to downward pressure on prices, and firms will reduce their price. This will lead to a contraction in supply and an expansion in demand until quantity demanded equals quantity supplied (market equilibrium), and the surplus is eliminated

Question 3

When will there be a shortage or excess demand?

Answer 3

at a price below the equilibrium price, the quantity demanded will exceed the quantity supplied of the good, leading to a shortage

Question 4

What will happen when there is a shortage of supply

Answer 4

a shortage will lead to upward pressure on prices, and firms will increase their price. This will lead to a contraction in demand and an expansion in supply until quantity demanded equals quantity supplied (market equilibrium), and the shortage is eliminated

Question 5

What is market equilibrium

Answer 5

when the quantity demanded is equal to the quantity supplied, and there is no tendency for the price to change

Question 6

what is another name for equilibrium price

Answer 6

market price

Question 7

what is market disequilibrium

Answer 7

It is allocatively inefficient as there is excess demand (shortage) or excess supply (surplus) and the forces of demand and supply will cause the price to change until it reaches market equilibrium.

Question 8

what happens when there is a change in a non-price determinant of demand or supply

Answer 8

the market will adjust to a new equilibrium

Question 9

what does a free good mean

Answer 9

the quantity supplied is greater than the quantity demanded even at the price of zero

Question 10

what does an economic good mean

Answer 10

the quantity supplied is smaller than the quantity demanded at the price of zero