How a competitive market works? Flashcards
What is equilibrium?
The price at which demand = supply and there is no tendency for change
What is disequilibrium?
A situation within the market where supply doesn’t = supply
How can excess supply be shown on a graph?
A price line above the equilibrium price
What is excess supply?
When supply at a particular price is greater than demand
How will a firm react to excess supply? (2)
Reduce the price
Reduce production
What is the market clearing price?
The price at which all goods that are supplied will be demanded
How can excess demand be shown on a graph?
A price line below the equilibrium level
What is excess demand?
When demand is greater than supply at a given price
How will a firm react to excess demand? (2)
Increase supply
Increase price
What is maximum price?
A price ceiling above which the price of a good or service is not allowed to increase
How can maximum price be shown on a diagram?
Set below the equilibrium price
What is minimum price?
A price floor below which the price of a good or service that is not allowed to decrease
What is zero pricing?
A good is provided free at the point of use
