4.1.2.5 The determination of equilibrium market prices Flashcards
What is market equilibrium?
Market equilibrium occurs when the quantity demanded equals the quantity supplied at a specific price. At this point, there is no tendency for prices to change.
What is the market clearing price?
The market clearing price is the price at which the quantity demanded equals the quantity supplied, resulting in market equilibrium.
What is excess demand?
Excess demand occurs when the price is below the equilibrium price, leading to a situation where quantity demanded exceeds quantity supplied. This creates a shortage.
How does excess demand affect price?
Excess demand pushes prices up as consumers compete for limited goods. Higher prices encourage firms to increase supply, restoring equilibrium.
What is excess supply?
Excess supply occurs when the price is above the equilibrium price, leading to a situation where quantity supplied exceeds quantity demanded. This creates a surplus.
How does excess supply affect price?
Excess supply causes prices to fall as firms try to sell surplus goods. Lower prices encourage consumers to buy more, restoring equilibrium.
What is the difference between equilibrium and disequilibrium?
Equilibrium: Quantity demanded equals quantity supplied, and prices are stable.
Disequilibrium: Quantity demanded does not equal quantity supplied, leading to shortages or surpluses and price adjustments.
How does the market return to equilibrium from excess demand?
Prices rise due to excess demand, encouraging firms to increase supply and consumers to reduce demand until equilibrium is restored.
How does the market return to equilibrium from excess supply?
Prices fall due to excess supply, encouraging firms to reduce supply and consumers to increase demand until equilibrium is restored.
What causes a new market equilibrium?
A new market equilibrium is established when the demand or supply curve shifts due to factors like changes in population, income, technology, or production costs.
What happens to equilibrium price and quantity if demand increases?
If demand increases, the demand curve shifts outward, leading to a higher equilibrium price and a larger equilibrium quantity.
What happens to equilibrium price and quantity if supply increases?
If supply increases, the supply curve shifts outward, leading to a lower equilibrium price and a larger equilibrium quantity.
What is a shortage in the market?
A shortage occurs when quantity demanded exceeds quantity supplied at a given price, often due to prices being below the equilibrium level.
What is a surplus in the market?
A surplus occurs when quantity supplied exceeds quantity demanded at a given price, often due to prices being above the equilibrium level.
How do demand and supply interact to determine prices?
Prices are determined by the interaction of demand and supply. When demand equals supply, the market reaches equilibrium. Imbalances cause prices to adjust until equilibrium is restored.
What is the role of price in restoring market equilibrium?
Price acts as a signal and incentive:
Excess demand: Prices rise to encourage more supply and reduce demand.
Excess supply: Prices fall to encourage more demand and reduce supply.
How can demand and supply diagrams be used to analyze real-world markets?
Demand and supply diagrams help analyze how changes in factors like income, population, or technology affect equilibrium prices and quantities in real-world markets.
What is an example of a new market equilibrium?
If population growth increases demand, the demand curve shifts outward, leading to a new equilibrium with a higher price and a larger quantity.
