Market Equilibrium

Question 1

Market Equlibrium

Question 2

Price mechanism

Answer 2

The system where prices are determined by demand and supply in competitive markets, resulting from the free interaction of buyers and sellers

Question 2

Signalling

Answer 2

In the event of asymmetic information this is a method used by the seller when the seller has more information, which attempts to convince the buyer that the product is of a good qaulity

Question 3

Prices as incentives

Answer 3

The ability of prices and changes in prices to convey information to consumers and prdoucers that motivates them to respond by offering them incentives to behave in their best self interest
(firms according to law pf supply and consumers i order of law of demand)

Question 4

Prices as signals

Answer 4

The ability of prices and changes in price to communicate information to consumers and producers about the existence of excess demand or excess supply, on the basis of which they make economic decisions, which together with prices as incentives lead to an efficient allocation of resources.

Question 5

Allocative efficiency

Answer 5

An allocation of resources that results in producing the combination and quantity of goods and services mostly preferred by consumers

(Marginal Social benefit = Marginal Social Cost)

Question 6

Marginal benefit

Answer 6

The extra or additional benefit received from consuming one kore unit of a good

Question 7

Consumer surplus

Answer 7

Refers to the difference between the highest prices consumers are willing to pay for a good and the price actually paid

Question 8

Producer Surplus

Answer 8

Refers to the difference between the price received by firms for selling their good and the lowest price they are willing to accept to produce the good

Question 9

Social Surplus/Community Surplus

Answer 9

The sum of consumers and producer surplus; it is maximum in a competitive market with no market failures

Question 10

Welfare Loss

Answer 10

Refers to loss of a portion of social surplus that arises when marginal social benefits are not equal to marginal costs

Question 11

Excess Supply

Answer 11

Extra supply that results when quantity supplied is greater than quantity demanded

Question 12

Excess Demand

Answer 12

Lack of supply when quantity demanded is greater than quantity supplied

Question 13

Surplus

Answer 13

Quantity supplied is greater than quantity demanded

Question 14

Equlibrium Price

Answer 14

The price determined in a market when quantity demanded is equal to quantity supplied and there is no tendency for the price to change.

Question 15

Shortage

Answer 15

Quantity demanded is greater than quantity supplied

Question 16

Functions of Signals

(To do with price)

Answer 16

• they adjust where resources are required
• rises = scarcity
• falls = surplus
  *

Question 17

Functions of Incentives

(To do with decision making)

Answer 17

• decision making/choices
• consumers send info to producers about their changing nature of needs and wants
• in free market decision making is decentralized (no single body deciding)

Question 18

What is the signal if prices are rising

Answer 18

• In scenario of excess demand/shortage
• signal to suppliers
• expand production to meet higher demand

Question 19

What is the signal if prices are falling

Answer 19

• In scenario of excess supply/surplus
• price mechanisms allows market price to fall

Question 20

What is the incentive

Answer 20

• communicates to consumers if price is low = cheaper = buy more