Part D: Equilibrium and the Price Mechanism

Equilibrium

A state at which all forces balance out

Market equilibrium

Where quantity demanded = quantity supplied (Qd = Qs)

Equilibrium price

The price where Qd = Qs

Equilibrium quantity

The quantity bought and sold where Qd = Qs

Disequilibrium

Any price where Qd ≠ Qs; it is temporary

Surplus (excess supply)

Quantity supplied > quantity demanded at the market price

Shortage (excess demand)

Quantity demanded > quantity supplied at the market price

Price mechanism

Prices determined by the forces of supply and demand in competitive markets

Invisible hand (Adam Smith)

The unseen market forces of supply and demand that coordinate resource allocation within a free market

Signals

prices communicate information to decision makers

Incentives

prices motivate decision makers to respond to the information

Rationing

Prices allocate scarce resources to consumers who are willing and able to pay