E Describe the concept of equilibrium (partial and general), and mechanisms by which markets achieve equilibrium Flashcards
In free markets, the equilibrium price is the price at which the quantity demanded equals the quantity supplied. When the market price is greater than the equilibrium price, the quantity supplied is greater than the quantity demanded (excess supply), and competition among suppliers for sales will drive the price down towards the equilibrium price. When the market price is less than the equilibrium price, the quantity demanded is greater than the quantity supplied (excess demand), and competition
the concept of general equilibrium (General equilibrium analysis also considers the effects of one good’s price change on the prices of other goods that may in turn affect demand for the good.)
Determines prices and quantities in all markets simultaneously (feedback effect)
What brings all the markets to a general
equilibrium is the change in relative prices
General Equilibrium Analysis: Relationships between the quantity demanded of the good and factors that may influence demand are taken into account.
The concept of partial equilibrium
Assumes that activity in one market does not affect others. Used to analyze individual markets because we are taking the factors that may influence demand as fixed except for the price.
Analysis of the market for a single good is called partial equilibrium analysis
Equilibrium
The price at which the Qs = Qd
Assumption: Buyers compete for available goods on the basis of price only, and suppliers compete for sales only on the basis of price. Behavior: Markets forces will drive the price to its equilibrium level.
In free markets, the equilibrium price is the price at which the quantity demanded equals the quantity supplied. When the market price is greater than the equilibrium price, the quantity supplied is greater than the quantity demanded (excess supply), and competition among suppliers for sales will drive the price down towards the equilibrium price. When the market price is less than the equilibrium price, the quantity demanded is greater than the quantity supplied (excess demand), and competition for the product among buyers will drive the price up towards the equilibrium price.
A price above equilibrium (Mechanism by which market achieves equilibrium: Producers drop prices)
Excess supply - The quantity willingly supplied exceeds the quantity consumers are willing to purchase. Behavior: Suppliers willing to sell at lower price will offer those prices to consumers, driving the market price down towards the equilibrium level.
A price below equilibrium (Mechanism by which market achieves equilibrium: Consumers bid higher prices)
Where Qd>Qs, and consumers will offer higher prices to compete for the available supply, driving the market price up towards its equilibrium.
The market mechanism which brings all markets back to equilibrium
The change in relative prices
Partial equilibrium analysis is least likely to include the effect of:
Partial equilibrium analysis does not consider the effect of changes in the equilibrium price of a good on the markets for other goods. For example, under partial equilibrium analysis, the effect of a change in the price of a good on the demand for a complement, and the resulting change in the equilibrium price of the complement, are not considered. The demand function for a good assumes the price of a complement is fixed. A general equilibrium analysis would include this secondary effect of a change in the price of a good on the equilibrium price of a complement. Consumer income and preferences are included in the demand function for a good under partial equilibrium analysis.
