4.1.3.5 the determination of equilibrium market prices

Question 1

what happens at equilibrium?

Answer 1

• price and output are stable
• there’s a balance in the market
• QS is equal to QD
• all products that are presented for sale are sold and the market is cleared

Question 2

what is the free market?

Answer 2

market with no government intervention

Question 3

what happens in a free market?

Answer 3

• supply and demand determine the equilibrium price and quantity
• this free interaction of supply and demand is shown as market forces
• excess demand and supply won’t exist for long in a free market
  -> market forces act to remove excess supply or demand

Question 4

what happens when there’s excess supply and demand?

Answer 4

excess supply
- when the quantity supplied to a market is greater than the quantity demanded

excess demand
- when the demand for a good/service is greater than supply

Question 5

how do you show excess supply on a diagram?

Answer 5

Question 6

how do show excess demand on a diagram?

Answer 6

Question 7

do markets clear?

Answer 7

according to neoclassical free market economists

• free action of the firms and consumers causes markets to clear
• disequilibrium will cause price changes that move us towards an equilibrium again

Question 8

what do critics say prevents markets from clearing?

Answer 8

• market forces
  -> are too weak to restore equilibrium
  -> if markets are intervened then market mechanism can’t work
  eg) labour market
• time lags
  -> new equilibrium isn’t reached before a new one is created
  -> the time that markets take to clear, new market changes may happen in that period
  -> by the time we reach that equilibrium it’s not the actual equilibrium anymore

Question 9

why does disequilibrium occur?

Answer 9

• sticky prices
  -> firms may be committed to keeping prices the same for a pre-determined period of time
  -> changes in demand => shortage / surplus because firm doesn’t want to keep changing prices (especially when D is volatile)
• social factors
  -> firms may keep prices deliberately low because they have a commitment to the community
  eg) landlord not increasing rent, football clubs not increasing ticket prices
• government factors
  -> max or min prices or gov regulating prices