Market Equilibrium Flashcards
What is market equilibrium?
The point where the supply and demand curve intersect and it is the point where both producers and consumers are satisfied.
What will happen to the market price when there is excess supply or demand?
Will cause the price to change so that the quantity demanded will equal the quantity supplied.
What are free goods?
Free goods are not subject to scarcity. When quantity supplied is greater than quantity demanded when teh price level is zero - all other goods are economic goods
What is the price mechanism?
- What should society produce?
- How much should society produce?
- How should society produce?
- For whom should society produce?
This is controlled by the ‘invisible hand’
What are signals and incentives in a product market?
Prices act as signals to provide information to economic decision makers
Prices act as incentives to motivate decision makers to respond to information
What functions does price have?
- Signalling function
- Rationing function
- Incentive function
What is the shaded area below and describe what it means?
Consumer surplus.
Equilibrium is at $4. At equilibrium point, there are consumers who are willing and able to pay a higher price ($14).
What is the area under the purple part called and describe what it is?
Producer surplus
The producer could have sold his products at $3 but the producer does not need to sell for as little as $3.
What happens when a market is in a state of equilibium?
It is said to be socially efficient or in a state of allocative efficiency
What is community(social) surplus?
The sum of consumer and producer surplus; the total benefit to society of the equilibrium
Define allocative efficiency.
It is achieved if just the right amount of a good is produced from society’s point of view. It is achieved if, for the last unit produced, price is equal to marginal cost or if the marginal social benefit is equal to marginal social cost.
Define marginal social benefit?
The extra or additional benefit of consuming one more unit of a good enjoyed by society
Define marginal social cost
The extra or additional costs of producing one more unit of good incurred by society
What is another term for demand and supply curve?
Demand curve= Marginal benefit curve
Supply curve= Marginal cost curve
What happens if MB>MC?
The society is gaining more benefit producing a good than it costing society to produce it therefore it makes more sense to make more of it.
