equilibrium Flashcards
What is an equilibrium?
Equilibrium in economics means a balanced state in a market where the quantity of goods or services supplied matches the quantity demanded, leading to a stable economic condition.
What is excess demand? What will happen to prices in a market if there is excess demand? Why?
Excess demand, also known as a shortage, occurs in a market when the quantity demanded of a good or service exceeds the quantity supplied at the current price. In this situation, consumers are willing to buy more than what producers are willing to sell. When there is excess demand, prices in the market tend to rise.
What is excess supply? What will happen to prices in a market if there is excess supply? Why?
Excess supply, also known as a surplus, occurs in a market when the quantity supplied of a good or service exceeds the quantity demanded at the current price. In this situation, producers are willing to sell more than what consumers are willing to buy. When there is excess supply, prices in the market tend to fall. This price decrease serves as a mechanism to balance the market by reducing the quantity supplied and encouraging consumers to buy more, ultimately bringing the market back to equilibrium.
What is community surplus? How do you calculate it?
Consumer Surplus: This is how much consumers gain when the price they pay is less than what they were willing to pay.
Producer Surplus: This is how much producers gain when they receive a price higher than their minimum acceptable price.
Community Surplus (Total Surplus): The total benefit in the market is the sum of what consumers gain and what producers gain.
Can you show consumer, producer and community surplus using a demand and supply diagram
Consumer surplus is the triangular area between the demand curve and the price level that consumers actually pay. It extends up to the quantity they are willing to buy at that price.Producer surplus is the triangular area between the supply curve and the price level that producers receive. It extends up to the quantity they are willing to sell at that price.Community surplus is the sum of consumer surplus and producer surplus.
what is a price mechanism
The price mechanism is an economic system where prices are determined by the forces of supply and demand in a free market. It acts as a signaling and coordinating mechanism for the allocation of resources.
Why is it, in principle, efficient to allocate resources using the price mechanism?
the efficiency of the price mechanism lies in its ability to harness individual decisions, respond to changing conditions, and align resource allocation with consumer preferences and market dynamics.
Why might the price mechanism not always function properly? · Why are some prices not set by the price mechanism but by the state? Can you give any examples?
Challenges to Proper Functioning of the Price Mechanism:
Externalities:
The price mechanism may fail to account for external costs or benefits associated with production or consumption, leading to overproduction or underproduction of goods.
Public Goods:
Goods with public good characteristics, such as national defense or public parks, may not be efficiently allocated by the market. The price mechanism may result in underprovision, necessitating state intervention.
Market Power:
Monopolies or oligopolies can manipulate prices and restrict competition, distorting the efficient allocation of resources. State intervention may be needed to regulate such markets.
Incomplete Information:
Asymmetric information or lack of access to complete information can hinder the proper functioning of the price mechanism. Consumers or producers may make suboptimal decisions due to informational gaps.
Income Inequality:
The price mechanism may lead to income inequality, as individuals with higher incomes can afford more goods and services. The state may implement policies to address this through taxation or social welfare programs.
Meritorious Goods:
Some goods, like education or healthcare, are considered meritorious and essential for societal well-being. State intervention may be necessary to ensure equitable access, as the market alone may not provide sufficient quantities.
Cyclical Unemployment:
Economic downturns can lead to cyclical unemployment, where the price mechanism alone may not address unemployment issues. State interventions, such as fiscal and monetary policies, are often employed to stabilize the economy.
Environmental Concerns:
The price mechanism may not adequately reflect environmental costs, leading to overexploitation of natural resources. State regulations and environmental policies may be required to address this.
Market Failures:
Instances of market failures, such as information asymmetry, externalities, or public goods provision, may necessitate state involvement to correct inefficiencies and ensure a fair distribution of resources.
Examples of State-Set Prices:
Minimum Wage:
Governments may set a minimum wage to ensure workers receive a basic level of compensation, addressing concerns about income inequality and ensuring a decent standard of living.
Price Controls:
During emergencies or to prevent price gouging, governments may impose price controls on essential goods and services like food, medicine, or utilities.
Subsidies:
Governments may provide subsidies to support industries or activities deemed crucial for societal well-being, such as agriculture, education, or renewable energy.
Rent Control:
In certain housing markets, governments may implement rent control measures to prevent excessive rent increases and ensure affordable housing for citizens.
Public Utilities:
Prices for essential public utilities like water, electricity, or transportation may be regulated by the state to prevent exploitation and ensure accessibility.
