market equilibrium

Question 1

what is an equilibrium?

Answer 1

refers to a situation in which the price has reached the level where quantity supplied equals quantity demanded

Question 2

what is the equilibrium price?

Answer 2

the price that balances quantity supplied and quantity demanded, on a graph it is the price at which supply and demand curves intersect

Question 3

what is the equilibrium quantity?

Answer 3

the quantity supplied and quantity demanded at the equilibrium price, on a graph it is the quantity at which supply and demand curves intersect

Question 4

what happens when the market is not in equilibrium?

Answer 4

supply may be higher than demand: excess supply - there is a surplus of the good on the market

supply may be lower than demand: excess demand - there is a shortage of the good on the market

Question 5

what is excess supply and demand?

Answer 5

excess demand: QD>QS
excess supply: QS>QD

the market clears when there is no excess demand or supply

Question 6

what happens when the market is not in equilibrium?

Answer 6

when there is excess supply, sellers are not able to sell all their stocks at current prices -> they will cut prices, the price will fall until the market reaches equilibrium

when there is excess demand, consumers are not able to buy all they want at current prices -> sellers can raise prices without cutting sales, the price will rise until the market reaches equilibrium

Question 7

what is the law of supply and demand?

Answer 7

the claim that the price of any good adjusts to bring the quantity supplied and quantity demanded of that good into balance.

Question 8

what are the 3 steps for analysing changes in equilibrium?

Answer 8

1. decide whether the events shift the supply or demand curve (or perhaps both)
2. decide in which direction the curve shifts
3. use the supply-and-demand graph to see how the shift changes the equilibrium (i.e. how equilibrium quantity and price change)

Question 9

how do equilibrium price and quantity change when demand and supply increase/decrease

Answer 9

increase in demand = high equilibrium price and quantity
decrease in demand = lower equilibrium price and quantity

increase in supply = lower equilibrium price and higher equilibrium quantity
decrease in supply = higher equilibrium price and lower equilibrium quantity