Equilibrium in Perfect Competition Market

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Questions and Answers

What is the effect on the quantity supplied when the market price is set below the equilibrium price?

The quantity supplied increases significantly.

The quantity supplied decreases. (correct)

The quantity supplied remains unchanged.

The quantity supplied matches the quantity demanded.

How does the presence of more producers in a market affect the supply curve?

The supply curve shifts to the right. (correct)

The supply curve becomes steeper.

The supply curve shifts to the left.

The supply curve remains fixed.

How is equilibrium price determined in a perfectly competitive market?

By the cost of production only.

By government regulation.

By the highest price consumers are willing to pay.

When quantity demanded equals quantity supplied. (correct)

What happens when the market price is significantly higher than the equilibrium price?

There is excess supply in the market. Signup and view all the answers

What is indicated when the demand at a price of $3 exceeds the quantity supplied?

There is a shortage of goods. Signup and view all the answers

What is the role of the marginal social benefit and marginal social cost in determining equilibrium in a market?

They must equal the equilibrium price for market efficiency. Signup and view all the answers

In the context of market capture, what would likely happen if firms began to earn economic profits?

New firms will be incentivized to enter the market. Signup and view all the answers

How would the horizontal summation of supply curves function in a perfectly competitive market?

It sums the quantities supplied at various prices across all producers. Signup and view all the answers

What happens to quantity supplied when the wage rate increases?

It increases due to higher producer profitability. Signup and view all the answers

How is the new equilibrium price established after an increase in costs?

It is reached only when the quantity supplied equals quantity demanded. Signup and view all the answers

What is the effect of higher prices on consumer demand?

It generally leads to a decrease in quantity demanded. Signup and view all the answers

What results when the marginal benefit to consumers exceeds the minimum price producers accept?

Prices will pressure upward until equilibrium is reached. Signup and view all the answers

What does it mean for consumers and producers to become price takers?

They must accept the market price without negotiation. Signup and view all the answers

Which factors can shift the market supply curve for a product?

Changes in production costs or technology. Signup and view all the answers

How does an increase in the number of producers in a market typically affect the supply curve?

It shifts the supply curve to the right. Signup and view all the answers

What happens to the equilibrium quantity when the equilibrium price increases?

The equilibrium quantity decreases. Signup and view all the answers

What happens when the market price is less than the equilibrium price?

There is excess demand and prices rise. Signup and view all the answers

How does the total net benefit at the equilibrium price relate to consumer behavior?

It is equal to their consumer surplus. Signup and view all the answers

What occurs when there is an excess supply in the market?

Producers will reduce output. Signup and view all the answers

What is the relationship between marginal social cost and marginal social benefit at equilibrium?

They are equal at the equilibrium point. Signup and view all the answers

In a perfectly competitive market, what happens if the government interferes?

It can disrupt the achievement of equitable outcomes. Signup and view all the answers

What is the impact of new entrants in a market with excess demand?

They may increase competition, driving prices down. Signup and view all the answers

Which statement is true regarding producer surplus at the equilibrium price?

It maximizes total economic profit for producers. Signup and view all the answers

What drives the convergence of quantity produced and quantity demanded to the equilibrium quantity?

Private greed of consumers and producers. Signup and view all the answers

Study Notes

Equilibrium in a Perfect Competition Market

In a perfectly competitive market, the equilibrium price is reached when marginal social benefit equals marginal social cost.
At this price, producers will produce and suppliers will supply the quantity demanded, and consumers will consume that quantity.
If the market price is below the equilibrium price, there will be excess demand as consumers want to buy more than producers are willing to sell.
This excess demand will push the market price upwards, as consumers will bid higher prices and producers will ask for higher prices.
As the price rises, producers will increase their quantity supplied, and consumers will decrease their quantity demanded.
This process will continue until the market price reaches the equilibrium price, where the quantity demanded equals the quantity supplied.

An Increase in the Wage Rate

An increase in the wage rate for producers can shift the supply curve leftward, leading to a higher equilibrium price and lower equilibrium quantity.
This shift reflects the higher cost of production for producers, who will now supply less at each price level due to the increased labor costs.
The higher equilibrium price leads to a decrease in consumer demand, as some consumers are no longer willing or able to pay the higher price.

Market Price and Equilibrium Price

In a perfectly competitive market, producers and consumers are price takers, meaning they have no control over the market price.
If the market price is above the equilibrium price, there will be excess supply, as producers are producing more than consumers are willing to buy.
This excess supply will push the market price downwards, as producers will reduce their pricing to sell their surplus, and consumers will demand lower prices.
As the price falls, producers decrease their quantity supplied, and consumers increase their quantity demanded.
This process will continue until the market price reaches the equilibrium price, where the quantity demanded equals the quantity supplied.

Perfect Competition and Efficiency

Perfectly competitive markets can achieve an efficient allocation of resources, meaning that resources are used in a way that maximizes total social benefit.
This efficiency occurs because market forces naturally push the market towards the equilibrium price and quantity, where marginal social cost equals marginal social benefit.
However, perfectly competitive markets can be affected by factors like government intervention or a corrupted financial system, which can disrupt the efficient allocation of resources.

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Description

This quiz explores the concept of equilibrium price in a perfectly competitive market, where marginal social benefit equals marginal social cost. It discusses the impact of demand and supply adjustments on market equilibrium and the effects of wage rate increases on the supply curve. Test your understanding of these essential economic principles.