Micro 10 - Market Equilibrium Flashcards
What is the market equilibrium?
Equilibrium is the state in which market supply and demand balance each other
What does market equilibrium result in?
stable market prices
What happens when the market reaches equilibrium?
Demand is being met and there are no unsold products
What is market equilibrium also reffered to
Market clearing price
What happens when the market price is above the market clearing price?
Excess supply
How do you reach the market clearing price when the market price is higher than the market clearing price
The price needs to be decreased, resulting in a contraction along the supply curve as suppliers are less willing to supply their good at a lower price.
There will also be an extension along the demand curve, as more people want to buy the good at a lower price
What happens when the price is below the market clearing price
Quantity demanded is greater than Quantity supplied, so there is excess demand
How does an increase in demand affect the market equilibrium?
An increase in demand causes the demand curve to shift to the right from D1 to D2
As a result, more is demanded at any given price
This causes market price to increase from P1 to P2
The equilibrium quantity increases from Q1 from Q2
When there is an increase in demand, why does the equilibrium adjust?
if demand increased without price increasing, there would be a situation of excess demand
the price therefore has to increase to bring the market back into equilibrium.
How does an increase in supply affect the market equilibrium?
An increase in supply causes the supply curve to shift to the right, from S1 to S2
As a result, more is supplied at any given price
This causes the price to decrease from P1 to P2
The Equilibrium quantity increases from Q1 to Q2
When there is an increase in supply, why does the equilibrium adjust?
If supply increased without price decreasing, there would be excess supply.
The price therefore has to increase to bring the market to equilibrium
How does a decrease in demand affect the market equilibrium?
A decrease in demand causes the demand curve to shift to the left from D1 to D2
As a result less is demanded at any given price
This causes market price to decrease from P1 to P2
The equilibrium quantity decreases from Q1 to Q2
When there is a decrease in demand, why does the equilibrium adjust?
If demand decreased without price decreasing, there would be excess supply
How does a decrease in supply affect market equilibrium?
A decrease in supply causes the supply curve to shift to the left, from S1 to S2
As a result: less is supplied at any given price
This causes the market price to increase from P1 to P2
The Equilibrium quantity increases from P1 to P2
What is the impact on consumer surplus of a shift of the demand curve to the right?
Old consumer surplus: P1, A, B
New consumer Surplus: P2, C, D
Increase in demand increases consumer surplus
