Price mechanism Flashcards
Consumer surplus
The price that consumers are willing and able to pay vs the price they actually pay.
Producer surplus
The price that producers and willing and able to supply vis the price they actually receive.
Where is consumer surplus?
Below demand above equilibrium
Where is producer surplus?
Above supply curve, below equilibrium.
Incentive
Higher prices provide an incentive to supply more to the market (this is due to the profit motive)
Society surplus
Sum of consumer and producer surplus
ARSI
Allocates scarce resources
Rations excess demand/supply
Signals that price is too high/low
Incentives to change price and increase profit
Signalling
High price:
Allows new entrances to the market
Producers supply more and consumers buy less
Slow response
Price inelastic supply
Price mechanism
How the free market forces of supply and demand determine the prices of commodities
Rationing
Where resources are scarce, prices increase to ration the supply they have
