Market Equilibrium

Question 1

What does a market economy determine…

Answer 1

How much of G + S are sold and at what price.

Question 2

Analysis of market equilibrium is based off two assumptions…

Answer 2

1. Pure competition in the marketplace (no firms can influence outcomes, eg by setting prices)
2. No Govt. intervention.

Question 3

What does price mechanism determine…

Answer 3

Equilibrium in the market.

Question 4

Price mechanism…

Answer 4

Is the process by which the forces of supply and demand interact to determine; the market price at which goods and services are sold and the quantity produced.

Question 5

What does market equilibrium look like… (3)

Answer 5

1. Quantity demanded = Quantity supplied
2. The market clears (No excess sup. or dem.)
3. There is no tendency to change

Question 6

Process when Undersupply/Over demand

Answer 6

1. Under sup/Over dem
2. Price goes up (people pay more for limited stock)
3. Contraction in demand + Expansion in Supply
4. Curves meet at equilibrium.

Question 7

Process when Oversupply/Under Demand (4)

Answer 7

1. Oversup/Under Dem.
2. Firms sell stock cheap to clear it out.
3. Expansion in demand/Contraction in Supply
4. Meet at equilibrium.