6. Market Equilibrium, Price Mechanism and Market Efficiency

Question 1

Pe is

Answer 1

market clearing price- when everything produced will be sold

Question 2

equilibrium

Answer 2

P and Q in a market where S = D

Question 3

excess supply

Answer 3

more of a good is being supplied at a given price than it is demanded

Question 4

excess demand

Answer 4

more of a good is being demanded at a given price than it is being supplied

Question 5

“outside disturbances” to equilibrium is..

Answer 5

non price determinants of demand or supply

Question 6

price mechanism functions

Answer 6

SIR
Signal
Incentivize
Ration

Question 7

signalling function

Answer 7

adjust to show where resources should be allocated: scarcities/surpluses

• high demand –> P increase = producers should increase production
• excess supply –> PM will eliminate surplus by allowing price fall

Question 8

Rationing function- to ration scarce resources

Answer 8

if D > S –> P will be high and low supply/shortage is rationed to only those who are willing and able to buy at the high price

Question 9

Incentive function

Answer 9

• Consumers: lower P an incentive to buy more (vice versa) - receive more utility
• producers: higher P (increase in D) tells them to make more –> for more profit

Question 10

market efficiency

Question 11

consumer surplus

Answer 11

difference between the price the consumer was prepared to pay vs. price actually paid

Question 12

producer surplus

Answer 12

difference between market P recieved by seller vs. price they would’ve been prepared to sell for

Question 13

What will happen if the price of a good is higher than the equilibrium price?

Answer 13

demand increases

Question 14

The quantity of supplied will be higher than the quantity demanded. What will the producer do?

Answer 14

lower price to get rid of excess supply –> go back to E

Question 15

What will happen if the price is lower than the equilibrium price?

Answer 15

demand increases

Question 16

The quantity demanded will be more than the quantity supplied. What will the producer do?

Answer 16

increase price to rid excess demanded

Question 17

excess demand

Answer 17

when more of a product is demanded than is supplied at that given price level -
the market has a shortage

Question 18

consumers gain when… (surplus)

Answer 18

they pay less than they were willing to

Question 19

where is total consumers surplus on a graph

Answer 19

area under demand curve and above Pe

Question 20

community/social surplus

Answer 20

producer + consumer surplus

Question 21

allocative efficiency

Answer 21

when market is in equilibrium

resources are allocated in the most efficient way from society POV

Question 22

to find consumer or producer surplus

Answer 22

use triangle: 1/2bh