6. Market Equilibrium, Price Mechanism and Market Efficiency Flashcards
Pe is
market clearing price- when everything produced will be sold
equilibrium
P and Q in a market where S = D
excess supply
more of a good is being supplied at a given price than it is demanded
excess demand
more of a good is being demanded at a given price than it is being supplied
“outside disturbances” to equilibrium is..
non price determinants of demand or supply
price mechanism functions
SIR
Signal
Incentivize
Ration
signalling function
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
Rationing function- to ration scarce resources
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
Incentive function
- 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
market efficiency
consumer surplus
difference between the price the consumer was prepared to pay vs. price actually paid
producer surplus
difference between market P recieved by seller vs. price they would’ve been prepared to sell for
What will happen if the price of a good is higher than the equilibrium price?
demand increases
The quantity of supplied will be higher than the quantity demanded. What will the producer do?
lower price to get rid of excess supply –> go back to E
What will happen if the price is lower than the equilibrium price?
demand increases
The quantity demanded will be more than the quantity supplied. What will the producer do?
increase price to rid excess demanded
excess demand
when more of a product is demanded than is supplied at that given price level -
the market has a shortage
consumers gain when… (surplus)
they pay less than they were willing to
where is total consumers surplus on a graph
area under demand curve and above Pe
community/social surplus
producer + consumer surplus
allocative efficiency
when market is in equilibrium
resources are allocated in the most efficient way from society POV
to find consumer or producer surplus
use triangle: 1/2bh
