2.5 The Interaction of Markets Flashcards
The role of markets
1
Q
What is market equilibrium?
A
- When quantity demanded = quantity supplied
- A state of equality/balance
- Both parties in the market (buyer and seller) will be satisfied
2
Q
What is surplus/excess in supply?
A
When there’s more supply than demand
3
Q
What is shortage in supply?
A
When there’s more demand than supply
4
Q
What is disequilibrium?
A
Any position in the market where demand doesn’t equal supply
5
Q
What are the two cases of market forces moving a market that’s in disequilibrium back into equilibrium?
A
- The price set by producers is too high, creating a surplus of supply over demand. They will therefore then have to lower their prices to clear their stock
- The price set by producers is too low, creating a shortage of supply over demand. They will therefore then have to raise their prices to clear their stock
6
Q
What reasons will the equilibrium shift?
A
- A change in demand (demand curve shifts to the right if increases or left if decreases)
- A change in supply (supply curve shifts to the right if increases or left if decreases)
7
Q
What are some advantages of using demand and supply analysis?
A
- Give clearer ideas of prices to charge
- Analysis allows external organisations e.g. the government opportunity to assess what kind of intervention should be made
- More able to accurately predict shifts in demands and supply of commodities than services/more abstract goods
8
Q
What are some disadvantages of using demand and supply analysis?
A
- Assumes there’s only one market price
- Assumes ceteris paribus (the effect that one variable has on the other, provided everything else stays the same e.g. price of milk falls, ceteris paribus, quantity demanded for milk rises provided inflation, utility etc. don’t change)