Lesson 5 - Market Equilibrium Flashcards
Equilibrium
1) Point where supply + demand intersect
2) Equilibrium price + equilibrium quantity
3) Quantity of goods buyers want = Quantity of goods sellers willing/able to sell
Market Clearing Price
1) AKA Equilibrium price
2) Everyone in market satisfied
Surplus
1) When quantity supplied exceeds quantity demanded
2) Result = sellers reduce prices to get rid of excess supply (movement along curve until reaches equilibrium)
Shortage
1) Quantity demanded exceeds quantity supplied
2) Excess demand –> buyers willing to pay more –> price rises –> moves toward equilibrium
Law of supply and demand
1) price of any good adjusts to bring the quantity supplied and the quantity demanded into balance.
2) Happens quickly in well-functioning market
3 Steps to analyze changes in equilibrium
1) Decide if supply or demand curve shifts (possibly both)
2) Decide which direction curve shifts
3) compare initial equilibrium with new oneE
Example of supply/demand shift: Hot weather + ice cream
1) Hot weather –> changes consumer taste –> want more ice cream –> shifts demand to right
2) increase in quantity supplied + price
Shifts vs Movements in supply/demand
1) change in supply/demand = actual curve shifts
2) change in quantity supplied/demanded = movement along curve
Example = hurricane destroys sugar crops for ice cream producers.
1) Input prices increase –> supply curve shifts left –> increase in price + decrease in quantity supplied
Example = heat wave + hurricane strike in the same summer
1) Ambiguous SINCE demand goes to right (hotter) + supply goes to the left (increase in input prices)
2) Depending on extent –> if demand shifts to right a lot but supply only shifts left a bit –> increase in quantity supplied + price
3) BUT if demand shifts right only a little and supply goes left a lot –> increase in price BUT decrease in quantity supplied
Why were there such huge shortages during emergencies like COVID?
1) generally large retailers will not increase price during emergency –> seen as unethical
2) sometimes contracts prevent them from increasing price –> N95 masks
