2.5 The interaction of markets Flashcards
What is equilibrium?
State of equality or a state of balance between market demand and supply.
What is equilibrium price?
Equilibrium price is also known as clearing price since this is the amount consumers wish to buy and the amount producers wish to put up for sale are equal. Both parties in the market will be satisfied.
What is the diagram for market equilibrium?
What is disequilibrium?
Any position in the market where demand and supply are not equal.
What are the two cases of market forces moving a market in disequilibrium to equilibrium? (using the aid of diagrams)
- The price set by producers is too high - this creates a surplus of supply- however at a high price not many consumers will want to buy it- stocks will build up - firms must clear their stock by reducing prices.
- The price set by producers is too low - creating a shortage of supply- demand increases as prices are low - some consumers may offer to pay more - firms may charge higher price to gain more profit.
What is ceteris paribus?
Everything is always changing. It allows you to imagine a situation where only two variables change.
What are the factors influencing demand?
- Consumer income
- The prices of other goods
- Consumer preferences
What are the factors that influence supply?
- Cost of production
- Technology of production
- The prices of other related goods
- Government policy (taxes and subsidies)
- Firms expectations about future prices
- The size (number of firms in a market) and nature of the industry
- Other factors (weather, health scares)
Do the following question about changes to market equilibrium:
Effect of a change in demand on supply on equilibrium position? (With the aid of diagrams) ( check 2.5 the interaction of markets pg11 for diagram answers)
- A change in demand means the demand curve shifts to the right or left.
- A change in supply means the supply curve shifts to left or right.
- A more of less simultaneous change in demand and supply.
What is comparative static analysis?
Examines the effect on equilibrium of a change in external conditions affecting a market. Basically compares the new equilibrium with the original equilibrium after a change in a factor of supply or demand.
Draw diagrams for each of these cases:
1.Market holidays with an increase in incomes
2.Market for chicken with an outbreak of bird flu
3.Market for vinyl’s with a fall in price of CD’s
Check pages 12-13 on 2.5 booklet.
Why is looking at timescales important?
On the demand side of changes can be quick e.g. changes in tastes and fashion. Whereas on the supply side markets may be slow to responds unless the product has been stored in stock. This occurs if we assume ceteris paribus.
Related markets
A change in one market may cause an effect on other markets. For example, if the cost of dough falls this causes the price of pizza to fall. This may lead to a fall in demand for pasta which could be seen as a substitute good. There may also be a fall in demand for labor from producers of dried pasta resulting in lower wages and the quantity of employed workers in the labor market. This could also be applied to complementary goods.
Related markets - substitutes
(using the id of diagrams)
Rice and potatoes may be seen as substitutes for pasta. If the price of potatoes falls due to the fall in costs faced by potato farmers it decreases the equilibrium price of potatoes leading to a decrease in demand for pasta. This therefore may reduce demand for labor by producers of pasta leading to a reduction in wages. Reflecting the key term of related markets. How strong these effects are depends if the consumers see them as substituites.
