Free Markets Flashcards
Definition of free market
Any place where buyers and sellers meet to exchange goods or services without government intervention
Definition of market equilibrium
The market state where the supply is equal to the demand
Definition of marker disequilibrium
The state of demand and supply being imbalanced. This creates either excess demand or supply in the market.
Definition of market clearing
The market price where demand and supply are in equilibrium. Individuals have the ability to buy or sell at this price.
Definition of price mechanism
The process in which prices change in response to changes in demand and supply, so that a new equilibrium position is attained.
Steps of prices mechanism
S- Signal excess demand or supply and decide whether production needs to be increased or decrease
I- Incentivise producers to increase/ decrease production to ensure higher profits . E. Increase supply when prices are high.
R- Ration scarce resources by the ability and willingness. This encourages or discourages consumption.
A- Allocate scarce resources efficiently. Resources are allocated to where they are most valued.
How do firms deal with excess demand?
Firms will increase prices to maximise revenue. As a higher revenue is made, they are able to increase production to meet high demand.
How do firms deal with excess supply?
Firms will decrease prices in order to sell stock and prevent wastage. Due to law of demand, consumers will be more likely to buy these goods / services at a lower market price.
Define consumer surplus
The difference between the price that consumers are able/willing to pay and the price that they actually pay.
This is below the demand cover and above the price line
Define producer surplus
The difference between the price that producers are able/willing to supply at, and the price that they actually supply at.
This is above the supply curve and below the price line
