micro 2.3- competitive market equilibrium Flashcards
define shortage
Qd>Qs; excess demand; upward pressure in price
define surplus
Qs>Qd; excess supply; downward pressure in price
what is equilibrium price?
the price at which quantity demanded= quantity supplied
what is market equilibrium?
when quantity demanded = quantity supplied
state the 3 functions of the price mechanism
resource allocation
- signalling function
- incentive function
rationing/allocating function
define the free market
an economic system in which prices are determined by unrestricted competition between privately owned businesses.
define the price mechanism
the means by which decisions of consumers and businesses interact to determine the allocation of resources.
when is there market failure?
When the price mechanism results in loss of social welfare
describe the signalling function
changes in price provides information to both producers and consumers about changes in market conditions.
describe the incentive function
rational consumers and producers have an incentive to adjust their consumption and production in response to the signal.
describe the rationing or allocation function
Consumers and producers act on the signal and incentive in order to reallocate scarce resources.
define consumer surplus
consumer surplus is the extra utility gained by consumers from paying a lower price in comparison to what they were willing and able to pay
define producer surplus
producer surplus is the extra revenue gained by producers from selling at a higher price in comparison to what they were willing and able to sell
define social/community surplus
Consumer Surplus +Producer Surplus
define allocative efficiency
when resources are allocated in the most efficient way from society’s point of view:
- no over or under-allocation of resources
- social surplus is maximised
- marginal benefit = marginal cost
