Theme 5 - Market Equilibrium Flashcards
Define market equilibrium
A market is in equilibrium when the quantity demanded equals the quantity supplied at the market price.
Graphically, it is the intersection of supply (S) and demand (D).
What are the factors affecting supply and what effect do they have on the supply curve?
Price of the good (movement along the supply curve)
Other factors (shift of the supply curve)
- Input prices (raw material, wages, etc.)
- Technology
- Other factors
Remember that the supply curve is the marginal curve, any change in the cost will have a direct impact on the supply curve
What is total welfare? What does it mean to maximize welfare?
Total welfare, W, is the sum of the consumer surplus and the producer surplus.
W = CS + PS
Maximizing welfare means that all beneficial trades have been made
What is market regulation?
Many situations exist where the market is regulated; that is some governmental constraints are imposed on the market, preventing it from reaching the competitive equilibrium.
There are price ceilings (maximum price) and price floors (minimum price).
Market regulation can cause welfare losses
In which situation is the population affected more when there’s a change in the prices? (elasticity)
The less elastic the demand, the more captive the consumers are: they have less access to close substitutes.
When demand is more elastic, consumers are highly sensitive to price changes.
