Market Equilibrium and Supply-Demand Analysis

Flashcards covering key concepts related to market equilibrium, supply-demand analysis, and their applications.

What is market equilibrium?

Market equilibrium is a situation where the plans of all consumers and firms in the market match and the market clears, meaning market supply equals market demand.

What is excess demand in a market?

Excess demand occurs when the quantity demanded exceeds the quantity supplied at a given price.

What is excess supply in a market?

Excess supply occurs when the quantity supplied exceeds the quantity demanded at a given price.

What happens if the market price is above equilibrium price?

If the market price is above equilibrium price, there will be excess supply.

What happens if the market price is below equilibrium price?

If the market price is below equilibrium price, there will be excess demand.

At what point is equilibrium price determined in a perfectly competitive market?

Equilibrium price is determined where the market demand curve and the market supply curve intersect.

What is the relationship between marginal revenue product of labor and wage rate in determining labor employment?

A firm employs labor up to the point where the marginal revenue product of labor equals the wage rate.

How does a rightward shift in the demand curve affect equilibrium price and quantity with a fixed number of firms?

A rightward shift in demand increases both equilibrium price and quantity.

How does a leftward shift in supply affect equilibrium price and quantity?

A leftward shift in supply decreases equilibrium quantity and increases equilibrium price.

What does price ceiling mean?

Price ceiling is a government-imposed upper limit on the price of a good or service.

What is the consequence of imposing a price ceiling?

Imposing a price ceiling typically leads to excess demand for the good.

What does price floor mean?

Price floor is a government-imposed lower limit on the price of a good or service.

What occurs when a price floor is set above equilibrium price?

When a price floor is set above equilibrium price, it leads to excess supply in the market.

What is the significance of free entry and exit of firms in determining market equilibrium?

With free entry and exit, the market equilibrium price will always equal the minimum average cost of the firms.

How does a shift in demand impact equilibrium quantity and price when entry and exit of firms is allowed?

A shift in demand changes the equilibrium quantity but does not affect the equilibrium price; it remains at the minimum average cost.

What characterizes a perfectly competitive market?

A perfectly competitive market is characterized by many firms selling identical products and both buyers and sellers being price takers.

What is the impact of an increase in consumers' income on the demand for a normal good?

An increase in consumers' income generally leads to an increase in demand for a normal good, causing the demand curve to shift right.

How do simultaneous shifts in demand and supply affect equilibrium price?

Simultaneous shifts may lead to ambiguous effects on equilibrium price, depending on the magnitude of the shifts.