market equilibrium

Question 1

what is equilibrium

Answer 1

Equilibrium is when there is a ‘State of Rest’ or a ‘Situation of Balance’.

this balance (equilibrium) is when quantity demanded is equal to quantity supplied.

Question 2

what is a market clearing

Answer 2

when QD = QS

Question 3

what does QS < QD mean

Answer 3

disequilibrium.
QS < QD = Excess Demand/Shortage

Question 4

what QS > QD mean

Answer 4

we have disequilibrium.
QS > QD = Excess Supply/Surplus/Glut

Question 5

what are signs of excess demand/shortage

Answer 5

Long Lines & Queues, Out of Stock Signs, Waitlists, Raffles

Question 6

what are signs of excess supply

Answer 6

Fully stocked shelves, heavy discounts if excess supply

Question 7

what shifts market equilibrium

Answer 7

Shifting supply and demand curves inwards and outwards will shift the market equilibrium.

After these ‘Outside Disturbances’, the market will eventually adjusts to the new equilibrium (market clearing price).

Question 8

what does surplus mean

Answer 8

the amount of an asset or resource that exceeds the portion that’s actively utilized

Question 9

what causes outward shift of supply on market equilibrium graph

Answer 9

An outside disturbance has influenced supply, shifting it outwards from S1 to S2

original price of P will drop when there is excess supply

price drop leads to an extension demand

Question 10

what causes outward shift of supply on market equilibrium graph

Answer 10

An outside disturbance has influenced demand, shifting it outwards D1 to D2.

there is now excess demand. Price rises to leading to extension of Supply

Question 11

what is the role of price mechanism

Answer 11

forces of supply and demand known as the “price mechanism”, move markets to equilibrium. price mechanism helps to allocate scarce resources. Resources are allocated, and re-allocated, in response to changes in price. If there is an increase in the price of a good, due to an increase in demand for the good, then this gives a “signal” to producers that consumers wish to buy this good.

we can assume that producers are rational and wish to maximise their profits then a higher price will give producers an incentive to produce more of a good. Therefore, producers will allocate more resources towards those goods where the demand is highest, since this is where they will be able to make more profit

Question 12

what are the functions of price mechanism

Answer 12

it is responsible for the transmission of preferences in a free market economy.

Price Mechanism has key functions in society:
Signalling
Incentive
Rationing

Question 13

what has incentives got to do with price mechanism

Answer 13

Incentives: Price rises act as a basis of reward for consumers. Encourages firms to extend supply.

Question 14

what has rationing got to do with price mechanism

Answer 14

Rationing: Price rises encourage consumers to exit the market when there is excess demand

Question 15

what has signal got to do with price mechanism

Answer 15

Signal: Prices and price changes provide information to buyers and sellers about the current market conditions.

Information = whether there is a shortage (Rising prices) or surplus (Falling prices).

Question 16

what do rising prices do for price mechanism

Answer 16

Rising prices incentivise firms to extend supply and maximise profit.
Rising prices signal that the goods are becoming more scarce.
Rising prices ration of excess demand.

Question 17

give common examples of signalling

Answer 17

Shares & Stock Prices
Interest Rates
Oil Markets

Question 18

give common examples of rationing

Answer 18

Food Prices
Rent Prices
Online Auctions
Tickets for Major Events

Question 19

what is consumer surplus

Answer 19

Some consumers are willing to pay more than the equilibrium price (demand curve)

These consumers receive the benefits of
Receiving their goods
Paying less than they were willing to

Demand continues beyond the equilibrium price suggesting there are consumers that were willing to spend more.

Consumer Surplus will always be the area above the price line and below the demand curve.

Can be defined as:
‘Extra satisfaction (or utility) gained by consumers from paying a price that is lower than that which they are prepared to pay.’

Question 20

what is producer surplus

Answer 20

Some firms are willing to supply for less than the equilibrium price.

These firms receive the benefits of
Revenue from selling supply
Receiving more than they were willing to accept

Supply continues beyond the equilibrium price suggesting there are producers that were willing to accept less for the goods but consumers paid over this.

Producer Surplus will always be the area below the price line and above the Supply curve.

The difference between what producers are willing and able to supply a good for and the price they actually received.

Question 21

what is allocative effiency

Answer 21

Allocative efficiency refers to the optimal distribution of goods in an economy to meet the needs and wants of society.

Allocative Efficiency = Maximum Social Surplus (When equilibrium provides the greatest amount of social surplus.

Question 22

what happens when you shift consumer surplus

Answer 22

After the shift in supply, the equilibrium price has dropped. Consumer surplus increases as more individuals can purchase the good for a lower price than they would be willing to pay.

Question 23

what happens when you shift producer surplus

Answer 23

After the shift in supply, the equilibrium price has dropped. Producer surplus has increased as more firms can supply the good for a price above what they were willing to sell it for.