Unit 2.3 Market equilibirum Flashcards
Market definition
Any place where buyers meet suppliers to exchange good and services
Equilibirum definition
where demand=supply in a market
If price point is over equilibirum what happens
Excess supply (supply is higher then demand)
If price point is under equilibrium what happens
Excess demand (demand is higher then supply)
Why in a free market disequilibrium can never last?
What are the 4 functions of price mechanism (Acronym)
Allocate scarce resources effectively at equilibrium
Rations excess demand/supply
Signals that price is too high/low
Incentives to change price and increase profit
How do the operations of the functions of price mechanism can take problems of a disequilibrium in free market (with excess supply as example)
Signals are sent to producers that price is too high (they can see that by too much stock not being sold)
Market provides incentive for producer to reduce price to sell excess stock and make profit (contraction in supply curve and increase in demand curve)
This means they have rationed away ewxcess supplied as we are at the market equilibrium point
Therefore there is a perfect allocation of ressources
Consumer surplus defintion
- Difference between the highest price consumers are willing to pay for a product.
- And the actual price paid.
What are price incentives?
Motivation of decision makers to respond to information.
Define producer surplus.
- Difference between the minimum price producers are willing to accept for a product.
- And the actual price received.
Define social (community) surplus.
The sum of consumer and producer surplus.
Define social welfare
- The level of well-being of a population.
- In microeconomics, measured with social surplus.
Define allocative efficiency.
Using resources to produce the quantity of products most wanted by society.
