Market Equilibrium

Question 1

What is a free market?

Answer 1

Any place where buyers and sellers meet to exchange goods and services free from government intervetion.

Question 2

What is market equilibrium?

Answer 2

Where supply = demand
The market clearing position- no excess demand/supply

Question 3

What does equilibrium represent?

Answer 3

Allocative efficiency of resources- supply is perfectly equal to consumer demand

Question 4

What is ARSI?

Answer 4

The price machanism

Question 5

What is the price mechanism?

Answer 5

1. Allocate scarce resources efficiently
2. Signal excess demand/supply and the need for more/less resources
3. Incentivise producers to increase or decrease their production.
4. Ration scarce resources by by encouraging/discouraging demand.

Question 6

What does excess demand cause?

Answer 6

Upward pressure on prices
Signals excess demand and the need for more resources in the market

Incentivises firms to increase output to make more profit
Shown by an expansion along the supply curve

Ration scarce resources by discouraging consumption, causing a contraction along the demand curve.

Resources are now allocated efficiently.

Question 7

What does excess supply cause?

Answer 7

Downward pressure on prices
Signals excess supply and the need for fewer resources in the market

Incentivises firms to decrease output to make more profit
Shown by a contraction along the supply curve

Ration scarce resources by encouraging consumption, causing an expansion along the demand curve.

Resources are now allocated efficiently.