3.4: Market Equilibrium Flashcards
What is equilibrium?
An equilibrium is a situation in which opposing forces balance each other.
When does equilibrium in a market occur?
Equilibrium in a market occurs when the price balances buying plans and selling plans.
The equilibrium price is the price at which the quantity demanded equals the quantity supplied. The equilibrium quantity is the quantity bought and sold at the equilibrium price.
A market moves toward its equilibrium because:
-Price regulates buying and selling plans.
-Price adjusts when plans don’t match.
Explain how price works as a regulator
The price of a good regulates the quantities demanded and supplied. If the price is too high, the quantity supplied exceeds the quantity demanded. If the price is too low, the quantity demanded exceeds the quantity supplied. There is one price at which the quantity demanded equals the quantity supplied.
How does a shortage affect price?
A Shortage Forces the Price Up back to equilibrium
eg. As producers push the price up, the price rises toward its equilibrium. The rising price reduces the shortage because it decreases the quantity demanded and increases the quantity supplied. When the price has increased to the point at which there is no longer a shortage, the forces moving the price stop operating and the price comes to rest at its equilibrium.
How does a surplus affect price?
A Surplus Forces the Price Down back to equilibrium
eg. Suppose the price of a bar is $2. Producers plan to sell 13 million bars a week, and consumers plan to buy 7 million bars a week. Producers cannot force consumers to buy more than they plan, so the quantity that is actually bought is 7 million bars a week. In this situation, powerful market forces operate to lower the price and move it toward the equilibrium price. Some producers, unable to sell the quantities of energy bars they planned to sell, cut their prices. In addition, some producers scale back production. As producers cut the price, the price falls toward its equilibrium. The falling price decreases the surplus because it increases the quantity demanded and decreases the quantity supplied. When the price has fallen to the point at which there is no longer a surplus, the forces moving the price stop operating and the price comes to rest at its equilibrium.
When the price is below equilibrium, it is forced upward. Why don’t buyers resist the increase and refuse to buy at the higher price?
The answer is because buyers value the good more highly than its current price and they can’t satisfy their demand at the current price. In some markets—for example, the markets that operate on eBay—the buyers might even be the ones who force the price up by offering to pay a higher price.
When the price is above equilibrium, it is bid downward. Why don’t sellers resist this decrease and refuse to sell at the lower price?
The answer is because their minimum supply price is below the current price and they cannot sell all they would like to at the current price. Sellers willingly lower the price to gain market share
