Market Equilibrium, Disequilibrium and surplus
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Questions and Answers

Which of the following conditions defines market equilibrium?

  • The quantity demanded equals quantity supplied. (correct)
  • The quantity supplied exceeds quantity demanded.
  • The price is set artificially high by the government.
  • There is a surplus of goods available to consumers.

In a market, if the current price is set above the equilibrium price, what is the likely result?

  • Decreased production costs.
  • Increased consumer demand.
  • A surplus of the good. (correct)
  • A shortage of the good.

How does a shift in the supply curve, due to technological advancements, typically affect the equilibrium price and quantity?

  • Price increases, quantity increases.
  • Price decreases, quantity increases. (correct)
  • Price increases, quantity decreases.
  • Price decreases, quantity decreases.

If consumer income increases, how does this typically impact the market for normal goods?

<p>Demand increases, leading to higher prices. (D)</p> Signup and view all the answers

Which scenario exemplifies the concept of 'consumer surplus'?

<p>A consumer purchases a product at a price lower than they were willing to pay. (D)</p> Signup and view all the answers

What does 'producer surplus' measure in a market?

<p>The difference between the minimum price a seller is willing to accept and what they actually receive. (D)</p> Signup and view all the answers

How do government subsidies typically influence market equilibrium?

<p>Decrease the equilibrium price and increase quantity. (B)</p> Signup and view all the answers

If a new study reveals the negative health effects of consuming a particular good, what is the likely impact on its market?

<p>Demand will decrease, leading to lower prices. (B)</p> Signup and view all the answers

In the context of market equilibrium, what is the effect of imposing a price ceiling below the equilibrium price?

<p>A shortage of the good. (B)</p> Signup and view all the answers

Considering the market for coffee, what would likely happen if the price of tea, a substitute, significantly increases?

<p>The demand for coffee would increase. (D)</p> Signup and view all the answers

Which of the following best describes the role of prices in a market economy?

<p>Prices are signals that allocate resources efficiently. (B)</p> Signup and view all the answers

How might a significant increase in the price of crude oil affect the market for gasoline?

<p>Decrease the supply of gasoline, leading to higher prices. (D)</p> Signup and view all the answers

Assume a market is in equilibrium. If both supply and demand increase simultaneously, what can be definitively stated about the new equilibrium?

<p>The equilibrium quantity will increase. (A)</p> Signup and view all the answers

What characterizes a market dis-equilibrium?

<p>There is either excess supply or excess demand. (A)</p> Signup and view all the answers

If the market price of wheat increases, what is the most likely outcome for the market of bread, assuming wheat is a primary ingredient?

<p>The supply of bread will decrease. (B)</p> Signup and view all the answers

How do expectations about future prices typically influence current market behavior?

<p>Increased future prices lead to increased current demand. (B)</p> Signup and view all the answers

Which of the following correctly describes complements?

<p>Goods that are consumed together. (B)</p> Signup and view all the answers

What does the term 'derived demand' refer to?

<p>Demand for a good that arises as a result of the demand for another good. (C)</p> Signup and view all the answers

Which concept explains how a single product can satisfy several different needs or wants?

<p>Composite demand (A)</p> Signup and view all the answers

What characterizes 'joint supply' in economics?

<p>When the production of one good results in the production of another. (C)</p> Signup and view all the answers

Which best defines the price mechanism in a free market economy?

<p>Prices are determined by supply and demand. (D)</p> Signup and view all the answers

What is the 'signaling function' of the price mechanism?

<p>To provide information to consumers and producers. (C)</p> Signup and view all the answers

How does the 'rationing function' of prices operate in a market economy?

<p>Allocating goods to those who value them the most. (B)</p> Signup and view all the answers

In what way does the price mechanism provide an incentive for producers?

<p>By offering higher profits for meeting consumer needs efficiently. (D)</p> Signup and view all the answers

Which of the following describes the 'transmission of preferences' function of the price mechanism?

<p>It lets producers know what goods consumers desire most. (A)</p> Signup and view all the answers

Which option is an advantage of a price mechanism?

<p>It allows for efficient resource allocation. (C)</p> Signup and view all the answers

What is the relationship between consumer sovereignty and the price mechanism?

<p>The price mechanism conveys consumer preferences to producers. (B)</p> Signup and view all the answers

Which of the following is considered a disadvantage of relying solely on the price mechanism?

<p>Potential for market failures and inequality. (B)</p> Signup and view all the answers

Why might unemployment be considered a potential disadvantage of the price mechanism?

<p>Price mechanisms can lead to economic downturns that increase unemployment. (A)</p> Signup and view all the answers

Flashcards

Market Equilibrium

Exists when the quantity supplied equals the quantity demanded.

Equilibrium Price

The price at which the quantity demanded equals the quantity supplied.

Equilibrium Quantity

The quantity bought and sold at the equilibrium price.

Excess Demand (Shortage)

Occurs when the quantity demanded is greater than the quantity supplied.

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Excess Supply (Surplus)

The condition that exists when the quantity supplied exceeds the quantity demanded at the current price.

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Consumer Surplus

The difference between how much buyers are prepared to pay for a good and what they actually pay.

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Producer Surplus

The difference between the price a firm receives and the price it would be willing to sell it at.

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Complements (Joint Demand)

A good which is purchased with other goods to satisfy a want.

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Substitutes (Competitive Demand)

Goods that can be used in place of one another.

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Derived Demand

When the demand for one good is the result of or derived from the demand for another good.

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Composite Demand

When a good is demanded for two or more distinct uses.

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Joint Supply

When two or more goods are produced together.

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Price Mechanism

Prices are determined by the market; free market.

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Price Mechanism

The interaction of buyers and sellers in free markets enables goods, services, and resources to be allocated prices.

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Advantage of Price Mechanism

Signals the cost of purchasing goods to consumers and firms receive revenue.

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Advantage of Price Mechanism

Have power to determine what is bought and sold.

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Freedom of Choice

One of the advantages of the price mechanism.

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Advantage of Price Mechanism

Lower prices and efficient resource management.

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Advantage of Price Mechanism

Absence of market regulation.

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Disadvantage of Price Mechanism

Unequal distribution of wealth/income.

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Disadvantage of Price Mechanism

Market failure (under-provision of public and merit goods).

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Disadvantage of Price Mechanism

Leads to unemployment.

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Disadvantage of Price Mechanism

Causes price inflation.

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Study Notes

Market Equilibrium

  • Market equilibrium occurs when the quantity supplied equals quantity demanded
  • Equilibrium price exists when quantity demanded matches quantity supplied
  • Equilibrium quantity is the amount bought and sold at the equilibrium price

Market Disequilibrium

  • Excess demand/shortage happens when quantity demanded exceeds quantity supplied
  • Excess supply/surplus happens when quantity supplied exceeds quantity demanded

Shifts in Demand & Supply

  • Demand increase leads to a rise in both price and quantity
  • Demand decrease results in a fall in both price and quantity
  • Supply increase leads to a price decrease and quantity increase
  • Supply decrease results in a price increase and quantity decrease

Consumer and Producer Surplus

  • Consumer surplus signifies the difference between what buyers are willing to pay and what they actually pay for a good
  • Producer surplus is the difference between the price a business receives and the price they would be willing to sell at

Factors Causing Changes in Consumer and Producer Surplus

  • Shifts in supply and demand
  • Government policies such as taxes, subsidies, and price controls
  • Technological advancements which improve production efficiency and reduce costs
  • Competition from lower prices, raising consumer surplus but potentially reducing producer surplus
  • Quality improvements where higher-quality products increase consumer willingness to pay
  • Global factors such as exchange rates, international trade policies, and economic conditions
  • Rising demand increases consumer surplus and producer surplus

Interrelationships Between Markets

  • Complements is a good which is purchased with other goods to satisfy a want, like tennis rackets and tennis balls
  • Substitutes (AKA Competitive Demand) happens when two or more goods are substitutes for each other, for example Coca-cola and Pepsi
  • Derived Demand is when the demand for one good is related to the demand for another, for example cars and steel
  • Composite Demand signifies cases where a good can be used for two or more distinct purposes, for example milk which may be chosen for drinking, cheese making or yoghurt
  • Joint supply occurs when producing one good creates another, so that changes in supply for one automatically affect the other, for example beef and leather

Price Mechanism

  • The price mechanism describes how prices are determined by the market, through free market forces
  • Prices are determined by interacting buyers and sellers
  • Relative prices and price changes indicate supply and demand balances
  • The price mechanism solves economic resource allocation questions

Functions of Price Mechanism

  • Signaling function communicates information to consumers and producers
  • Rationing function allocates scarce goods to consumers who value them most
  • Incentive function motivates producers to respond to consumer demands
  • Transmission of preference where consumer preferences influence resource allocation

Advantages of Price Mechanism

  • Transparency for buyers and sellers
  • Consumer sovereignty dictates production
  • Freedom of choice in consumption and production
  • Efficient resource use
  • The system operates without regulation using the "invisible hand"

Disadvantages of Price Mechanism

  • Inequality of income and wealth
  • Market failure without government intervention
  • Potential for unemployment
  • Risk of inflation

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Description

Understand market equilibrium, where supply meets demand, and disequilibrium, marked by shortages or surpluses. Learn how shifts in supply and demand impact prices and quantities. Explore consumer and producer surplus.

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