Market Equilibrium Flashcards
What is market equilibrium?
When demand equals supply
Where does equilibrium occur?
It occurs when the demand curve intersects the supply curve
What is a surplus?
Surplus is when the quantity supplied is above the quantity demanded. It is shown if the price is above the equilibrium price.
What do producers do when there is a surplus?
Producers will be left with unsold goods and will reduce prices to ‘clear’ the market, causing the market price to fall back to equilibrium.
What is a shortage?
When the quantity demanded is above the quantity supplied, it is when the price is below the equilibrium price.
What happens when there is a shortage?
Consumers will compete for the limited goods by bidding the price up. Producers will also increase the price of the goods. The price will eventually rise back to equilibrium.
How does an increase in demand and an increase in supply have an effect on price and quantity?
- The effect on price is intermediate.
- The effect on quantity increases.
How does an increase in demand and a decrease in supply have an effect on price and quantity?
- The effect of price increases
- The effect on quantity is indeterminate
How does a decrease in demand and an increase in supply have an effect on price and quantity?
- The effect on price decreases
- The effect on quantity is indeterminate
How does a decrease in demand and a decrease in supply have an effect on price and quantity?
- The effect on price is indeterminate
- The effect on quantity is decreases
Why do prices in markets fluctuate (differ)?
- Either demand conditions change which shifts the demand curve.
- Or supply conditions change which shifts the supply curve
- If either curve shifts, then a new equilibrium will be established
What are the four possible changes in market equilibrium?
- An increase in demand
- A decrease in demand
- An increase in supply
- A decrease in supply
What may cause an increase in demand?
Demand may increase due to a rise in consumer income or an increase in the number of consumers, meaning consumers want more of the product and are willing to pay.
What may cause a decrease in demand?
Demand may have decreased due to a fall in consumer income or a change in preferences, meaning consumers want to purchase less of the product.
What may cause an increase in supply?
This may increase due to a fall in production costs, meaning producers want to supply more of the product
What may cause a decrease in supply?
May increase due to a supply disruption such as food or an increase in production costs.
