3. Market equilibrium, price mechanism, market efficiency

Question 1

Define equilibrium

Answer 1

EQUILIBRIUM: state of rest, self-perpetuating in the absence of any outside disturbance

Question 2

Point of equilibrium

Answer 2

Makret is at equilibrium at price Pe because quantity Qe is both demanded nad supplied

Pe- market clearing price - evry product will be sold for that price

Question 3

How excess supply is created

Answer 3

If producers try to raise price above Pe - quantity demanded falls while quantity supplied increases - excess suply of Q1-Q2

Price must be lowered - back at equilib

Question 4

How excess demand is created

Answer 4

Suppliers lower the price below Pe - quantity demanded rises above quantity supplied - excess demand of Q3-Q4

To eliminate shortage - producers need to raise prices - equilibrium

Question 5

Creating new equilibrium

Answer 5

Demand/supply changes due to non-price determinants - curve shifts - new equilibrium establishe

Question 6

Define price mechanism

Answer 6

PRICE MECHANISM: the forces of demand and supply

Question 7

Price mechanism in resource allocation

Answer 7

Price mechanism helps allocate scarce resources - increase in price - increase in demand - signals to produce more of that product - more resources into those goods

Invisible hand in the economy moving factors of production to allocate resources

Question 8

What determines market efficiency

Answer 8

1. Consumer - producer surplus
2. Allocative efficiency

Question 9

Explain consumer - producer surplus

Answer 9

CONSUMER: willing to pay 15$ for Qe thingies - paid lower price Pe - gained

PRODUCER: willing to sell for 1$ but receives 10$ - gained

Question 10

Define consumer surplus

Answer 10

CONSUMER SURPLUS: extra satisfaction/utility gained by consumer from paying a price that is lower than that which they are prepared to pay

Question 11

Define producer surplus

Answer 11

PRODUCER SURPLUS: excess of actual earnings that a producer makes from a given quantity of output, larger than the amount the producer would be willing to accept for that output

Question 12

Define allocative efficiency

Answer 12

ALLOCATIVE EFFICIENCY (or socially efficient): a state of a market when it operates at equilibrium witho no external effects nor influences

From scociety’s point of view - resources allocated efficiently - at equilibrium community surplus (total benefit to society) maximised

Free market leads to allocative efficiency