Competitive market equilibrium Flashcards
Market equilibrium (market clearing price)
when the quantity demanded for a product is equal to the quantity supplied of the product
no shortages or surplus
What happens to equilibrium when there’s a shift in demand or supply
it will cause a change in the equilibrium price and quantity traded
Market disequilibrium
when quantity demanded for a product is either higher or lower than the quantity supplied in the market
there is either a shortage ( excess demand )
or there is a surplus ( excess supply )
Surplus and shortage
surplus is when the supply of a product exceeds its demand because price is set higher than equilibrium
shortage is when the demand of a product exceeds it supply because the price is set lower than equilibrium
definition of price mechanism
interactions between buyers and sellers in the free market in order to allocate resources, thereby determining production and consumption choices
What are the two main functions of price mechanism
resource allocation ( signalling and incentive ) Rationing ( of scarce resources )
Explain resource allocation in terms of the functions of price
price has a signalling function and an incentive function
A rise in the market price of smartphones, e.g sends a signal to potential manufacturers to enter the industry.
Higher prices in the market also acts as an incentive for existing suppliers to raise their output because they can earn more profit
These rise in prices may also act as a signal to consumers to reduce their demand or to withdraw from the market when prices are too high
define signalling and incentive function
signalling function is by providing information to producers and consumers where resources are required and where they are not
Incentive function is it provides an incentive for consumers and suppliers to change their behaviour in order to maximise their benefit
The rationing function of price mechanism
prevent some consumer from buying a product or resource owing to higher prices, thereby rationing the excess demand or supply.
then there would be a contraction or expansion along the demand curve.
Consumer surplus
gain or benefit to buyers who can purchase a product at a price lower than which they are willing and abel to pay
Producer surplus
the gain or benefit to firms that receive a price higher than the price they are willing and able to supply at.
Social / community surplus
Sum of consumer and producer surplus at a given market price and output
maximizing economic welfare, resources allocated efficiently
marginal benefit = marginal cost
Allocative efficiency
The best allocation of resources from society’s point of view. Maximising social surplus. Marginal cost = marginal benefit
Marginal benefit
extra benefit to consumer from consuming one more unit of a good (marginal benefit = demand curve)
Marginal cost
extra cost to producer from producing one more unit of a good (marginal cost = supply curve)
