2.4 - Competitive Markets: Demand and Supply - Competitive market equilibrium

Question 1

Surplus

Answer 1

Where Quantity supplied is greater the quantity demanded

Question 2

Shortage

Answer 2

Where quantity demanded is greater than the quantity supplied.

Question 3

What happens to price when there is an shortage or a surplus in a free market

Answer 3

The price will change so that the quantity demanded will be made equal to quantity supplied. Excess demand price rises and Excess supply price falls.

Question 4

Equilibrium

Answer 4

The stateof balance between different forces, such that there is no tendency to change.

Question 4

Market equilibrium

Answer 4

When the quantity demanded is equal to the quantity supplied

Question 5

Equilibrium price

Answer 5

Price in market equilibrium

Question 6

Equilibrium quantity

Answer 6

Quantity in market equilibrium

Question 7

Competitive market equilibrium

Answer 7

Quantity demanded equals quantity supplied and there is no tendency for the price to change

Question 8

Describe the change that occurs with an increase in demand.

Answer 8

At first D1 intersects S at point a where there is market equilibrium and eq quantity 1 and eq price 1.
A change in a determinant of demand shifts the demand curve from D1 to D2 .
Given d2 at the initial price there is a movement to point b, which results in excess demand (horizontal distance between points a and b)
Point b represents a disequilibrium thus exerting an upward pressure on price
The price therefore begins to increase causing a movement up d2 to point c
Excess demand is eliminated and a new equilibrium is reached.

Question 9

Describe the change that occurs with an increase in supply

Answer 9

The initial equilibrium is at the point where d intersects with s1 and eq price and quantity are p1 and q1
An increase in supply shifts the curve to s2
With s2 and initial price there is a move from point a to b where there is a disequilibrium due to excess supply
Therefore prices begin to fall and there results a movement down s2 to point c where a new equilibrium has been reached and excess supply has been eliminated

Question 10

A free good

Answer 10

A good for which the quantity supplied is greater than the quantity demanded when the price is 0
Supply is so large relative to demand that there is an excess supply even at price 0

Question 11

An economic good

Answer 11

A good for which the quantity supplied is smaller than the quantity demanded when the price is 0

Question 12

How can a free good become an economic good

Answer 12

As a result of a leftward shift in the supply curve and a rightward shift of the demand curve
When demand and supply intersect at a price greater than 0 the good has become an economic good.