market equilibrium

Question 1

what is market equilibrium?

Answer 1

this is the point where the market is successful, where the producers and consumers are happy when demand meets supply (crosses on the graph).

Question 2

what happens when a firm sets the price too high?

Answer 2

there is an excess supply as consumers aren’t happy at this price even though firms are happy, so firms must reduce price to clear out the stockpile

Question 3

what happens when a firm sets a price too low?

Answer 3

there is excess demand as consumers are happy to buy at this price, even though consumers aren’t happy to sell, so the firm must increase the price as they realize consumers will pay more for their product.

Question 4

what is consumer surplus?

Answer 4

when consumers are winning as the price the market is at equilibrium is lower than they would normally be willing to pay for

Question 5

what is producer surplus?

Answer 5

when producers are winning as they can sell their product at the market price equilibrium which is higher than they would initially be happy to sell it for

Question 6

rationing effect

Answer 6

when a supply side shock occurs like an increase in production cost, causing supply to decrease and resources become scarce. This causes excess demand, price increases, and quantity decreases

Question 7

incentive effect

Answer 7

an increase in prices signals to producers that they should increase supply to the market