Market equilibrium

Question 1

Define market eqm

Answer 1

• buyers and sellers come tgt
• exchange @ mutually agreeable price and quantity
• no tendency for price/quantity exchanged to change (stable)

Question 2

What each curve represents (DD and SS)

Answer 2

DD: marginal benefit
SS: marginal cost

Question 3

Define eqm price

Answer 3

• price at which Qdd=Qss of gd

- market-clearing price

Question 4

Determination of market eqm

Answer 4

1. Excess demand/Shortage

2. Excess supply/Surplus

Question 5

Define excess demand/shortage

Answer 5

• Qdd > Qss
• when price of gd below eqm price
• shortage brings upward pressure on price to achieve mkt eqm (overall)

Question 6

Adjustment process of excess demand/shortage (6 steps)

Answer 6

1. Identify shortage
2. Unsuccessful buyers willing to pay higher P to obtain limited supply
3. Upward pressure on P
4. Some consumers unwilling/unable to pay higher P, Qdd falls, upward movement along DD curve
5. Sellers respond to higher price offered, increase Qss of gd, upward movement along SS curve
6. Price continues to rise until shortage eliminated

Question 7

Define excess supply/surplus

Answer 7

• Qss > Qdd
• when price above eqm price
• surplus brings abt a downward pressure to price to achieve market eqm (overall)

Question 8

Adjustment process of excess demand/shortage (6 steps)

Answer 8

1. Identify surplus
2. Sellers lower prices to get rid of excess stock
3. Downward pressure on P
4. Some producer unwilling/unable to reduce P reduce Qss, downward movement along SS curve
5. Fall in P increases Qdd of gd by consumers, downward movement along DD curve
6. P continue to fall till surplus eliminated

Question 9

Changes in eqm price and quantity

Answer 9

1. Increase in demand
2. Decrease in demand
3. Increase in supply
4. Decrease in supply

Question 10

Increase in demand

Answer 10

• rightward shift of DD curve from D0 to D1
• initial shortage of Q0Q2 at original price P0
• exert upward pressure on P as unsuccessful buyers willing to pay higher price for limited supply
• some unwilling/unable to pay higher price, Qdd falls, upward movement along curve D1
• P rise, Qss rises, upward movement along curve S0
• Eqm reached when Qdd=Qss
• new eqm price (P1) and quantity exchanged (Q1) is higher