Market Equibilbrium Flashcards
What is equilibrium
The point at which the supply and demand curves interact - the market is cleared
What is the free interaction of supply and demand known as?
Market forces
What is excess supply?
When the price is set above the equilibrium, there is excess supply - the quantity supplied to a market is greater than the quantity demanded.
Price is then forced down, supply to contract and demand to extend until the equilibrium was reached.
What is excess demand?
Demand for a good/service is greater than its supply.
If the price for a good is set below the equilibrium, there would be excess demand as the price hits the supply curve before the demand curve.
The price is then forced up, demand to contract and supply to extend until the equilibrium was reached.
Diagram: Standard demand and supply diagram.
Providing demand shifts outward from D to D1, explain the affects?
Price increases from P to P1, extending supply from Q to Q1, creating a new equilibrium.
& Vice versa for a shift inwards in supply.
& Similar for Demand.
Explain the affect that elasticity (PES + PED) has on the market equilibrium
Influences the size of changes in the equilibrium price.
For example, if the demand curve shifts to the right along an elastic supply curve, this will have a larger effect on quantity than price. The opposite is true for an inelastic supply curve.
