Questions and Answers
What occurs at market equilibrium?
A downward-sloping demand curve is due to the law of supply.
False
Define market equilibrium price.
The price at which quantity demanded equals quantity supplied.
At _________, both buyers and sellers interact to determine the price and quantity of goods and services exchanged.
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Match the following terms with their definitions:
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What happens when there is a surplus in the market?
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A shortage occurs when Qdd is less than Qss.
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What is the equilibrium price represented by?
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In a shortage situation, the quantity demanded ( ext{Qdd}) is ______ than the quantity supplied ( ext{Qss}). Thus, there is upward pressure for the price to increase.
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Match the following terms with their definitions:
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At a price of USD2, if buyers are willing to buy 8 units but sellers only sell 4 units, what is the shortage?
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As price increases, buyers tend to find substitutes for the product.
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What tends to happen to the price in a shortage situation as demanders compete for limited supply?
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What occurs when the quantity supplied (Qss) is greater than the quantity demanded (Qdd)?
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A decrease in price will always increase the quantity supplied by sellers.
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What is consumer surplus?
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At a price of USD 5, if sellers are willing to sell 8 units of pens and buyers only want 4, there is a surplus of _____ units.
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Match the following terms with their definitions:
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What happens to the equilibrium price when there is a surplus?
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Producer surplus is calculated by finding the difference between the price received and the cost to produce the good.
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How does a government-set price affect market equilibrium?
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What is a price ceiling?
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A price floor is intended to ensure that prices do not exceed a certain amount.
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What is the purpose of government price intervention like price ceilings and floors?
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The minimum wage rate is an example of a __________.
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Match the following terms with their definitions:
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Study Notes
Market Equilibrium
- Market equilibrium occurs when quantity demanded equals quantity supplied (Qd = Qs).
- Demand curves slope downward due to the law of demand; supply curves slope upward reflecting the law of supply.
- Equilibrium indicates a stable state where no pressure for price or quantity change exists.
Definition of Market Equilibrium
- A market is where buyers and sellers interact to establish equilibrium price and quantity.
- In market equilibrium, there is no individual incentive for either buyers or sellers to alter their behavior.
Determining Equilibrium Price and Quantity
- Surplus occurs when quantity supplied (Qss) exceeds quantity demanded (Qdd), leading to downward pressure on prices.
- Shortage occurs when quantity demanded surpasses quantity supplied, driving prices up.
- Equilibrium is achieved when Qdd equals Qss, resulting in stable prices.
Shortages
- Shortages arise when Qdd > Qss; for example, at a price of USD 2, consumers desire 8 units while only 4 units are available, creating a 4-unit shortage.
- As price increases, consumers may seek substitutes, reducing Qdd, while suppliers increase supply due to higher profits, eliminating the shortage.
Surpluses
- Surpluses occur when Qss > Qdd; for instance, at a price of USD 5, sellers can supply 8 units but buyers only want 4, producing a surplus of 4 units.
- When price decreases, suppliers may reduce output due to lower profitability, while new buyers might enter the market, clearing the surplus.
Consumer Surplus
- Consumer surplus measures the benefit consumers receive when paying less than what they were willing to pay; for example, willing to pay USD 8 but purchasing at USD 3 results in a surplus of USD 5.
Producer Surplus
- Producer surplus reflects the profit sellers make when they receive a higher price than their minimum willing-to-accept price; for example, selling at USD 5 instead of the minimum USD 2 yields a surplus of USD 3.
Government Price Controls
- Governments may intervene in markets to address unfair pricing caused by supply and demand shifts.
- Price ceilings set maximum allowable prices, aiming to ensure affordability for essential goods and services below equilibrium prices.
Price Ceiling
- A price ceiling legally limits how high prices can rise; for instance, implementing a maximum price to protect consumers from excessive costs for necessary goods.
Price Floor
- Price floors establish minimum prices to prevent declines below a set level; commonly utilized in agricultural sectors to protect farmers from market fluctuations.
- The minimum wage is an example of a price floor, ensuring fair payment for labor and protecting workers from exploitation.
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Description
This quiz explores the principles of market equilibrium, including the relationship between demand and supply. Participants will learn about equilibrium price, quantity, and the effects of surplus and shortage in a market. Test your understanding of these essential economic concepts!
