3.3.5 - The Determination of Equilibrium Market Prices Flashcards
How is market equilibrium achieved in a competitive market?
The point of intersection of market demand curve and market supply curve.
What is equilibrium?
A state of rest or balance between opposing forces.
What is disequilibrium?
A situation in which opposing forces are out of balance.
What is market equilibrium?
A market is in equilibrium when planned demand meets planned supply, where the demand curve crosses the supply curve.
What is market disequilibrium?
At any point other than where planned demand meets planned supply.
i.e. planned supply < planned demand
planned supply > planned demand
Draw a market equilibrium graph.
What does a market equilibrium graph show?
A supply curve along with a demand curve.
How can we make it easier to explain the market?
Divide it into two sides, the short side and long side.
The short side can always fulfil their market plans, the long side cannot fulfil their market plans.
What is excess supply?
When firms wish to sell more than consumers wish to buy, with the price above the equilibrium price.
What is excess demand?
When consumers wish to buy more than firms wish to sell, with the price below the equilibrium price.
How does a shift of supply disturb market equilibrium?
An external factor can change the demand or supply required for the supply or demand curve, therefore leading to market disequilibrium.
What do producers do when they have excess stock?
If they are rational they will reduce the price they are willing to accept in order to sell more of the good, as demand of normal goods increases as price falls.
What happens in the market when there is excess demand?
To remove the excess demand and get back to market equilibrium, the price is increased to remove the demand.
What effect does expenditure tax have on the elasticity of demand?
The supply curve is shifted to the left and upwards as the costs are increased, therefore prices for the consumers are increased as the firm tries to pass the cost on as an indirect tax.
When demand is relatively elastic, means that some (but not all) of the tax is passed on as additional price to the consumer.
How is tax per unit shown on a graph?
The change between S1 and S2
The area known as T.
What would firms ideally do in an instance of increased tax?
Pass all the tax onto the consumers, by rising price to P1 + T.
What is the tax passed onto consumers known as?
The ‘shifted incidence’ of the tax.
