MICRO - 3. price system ✅ Flashcards
what is price equilibrium
demand = supply and market clearing price as all units sold and consumers satisfied
what can cause equilibrium price to change
demand changes - shift in demand or movement along demand curve and new equilibrium
supply changes - shift in supply or movement along supply curve and new equilibrium price
affect both consumer and producer surplus
what is excess demand and supply
EXCESS DEMAND - demand > supply , and shortage of products, prices driven up
EXCESS SUPPLY - supply > demand , and units remain unsold, prices driven down
what trade off is involved within price equilibrium
equilibrium price brings about trade off between buyer and seller as higher prices = more profit but higher consumption for buyer
disequilibrium is when supply and demand out of balance
why don’t markets always clear
market price isnt always at equilibrium so unpredictability with excess demand/supply
economical controversy in equilibrium prices
the extent to which markets tend towards market clearing prices and neo-classical free market economies tend to clear
what is the effect of free market forces
FREE MARKET FORCES - forces acting to reduce prices when excess supply occurs and increase prices when excess demand occurs
force market towards equilibrium price but can be argued too weak to lead away from equilibrium and restore it
legislation, trade unions and MNC monopolies can invalidate power of market
what is consumer and producer surplus
CONSUMER SURPLUS - difference between how much buyers prepared to pay vs what they actually pay
PRODUCER SURPLUS - difference between market price firms receive vs price at which prepared to supply
what causes producer and consumer surplus to change
if demand/supply change
INCREASE of DEMAND = higher equilibrium output and prices and producer and consumer surplus increase
DECREASE of DEMAND = fall in both consumer and producer surplus
INCREASE of SUPPLY = higher equilibrium output but lower price, increase in both consumer and producer surplus
DECREASE of SUPPLY = fall in both consumer and producer surplus
can demand = supply without equilibrium
yes demand can = supply without equilibrium as what bought must equal what sold actual demand must equal actual supply
where do volatile prices occur
not experienced in all markets, markets with stable demand and supply and price elasticity of demand and supply are high
products with unstable conditions of supply/demand experience price fluctuations
how does elasticity affect equilibrium price
supply highly elastic so shifts in supply curve don’t effect market equilibrium price massively
supply highly elastic so shifts in demand curve don’t effect market equilibrium price massively
when price elasticity low large changes in equilibrium price caused by supply shifts
shifts in demand when elasticity is low
causes of price volatility
- low PED especially in short run
- volatile market supply eg subject to supply shocks
- speculators , buying and selling to amplify price changes
