2.5 The determination of market equilibrium Flashcards
What is market equilibrium?
Point which supply = demand
What is the market clearing price(P*)?
Where all that is produced in a market, is sold
All buyers get the exact amount that they want at this price
All sellers provide the exact amount that they want to sell at this price
Therefore the market clears
What will a change in supply or demand lead to?
A new market equilibrium
What is excess supply?
Where price rises and the market equilibrium hasn’t adapted.
Demand reduces as less consumers are willing to pay higher prices.
Supply would increase as producing these products becomes more attractive.
What is excess demand?
Where price falls and the market equilibrium hasn’t adapted.
Prices are lower, so more consumers are willing and able to pay for goods, hence increase Qd.
Producing these goods becomes less attractive for firms and reduce production.
What do market forces do?
Push towards equilibrium price.
This is where supply = demand and there is no left over products on the market, and consumption is satisfied.
What is market equilibrium?
Market equilibrium is where the everything that is produced, is sold and is operating at the market clearing price.
What is market disequilibrium?
Market disequilibrium is where the market is operating below or above the market clearing price. This causes either excess supply or demand.
