2.4 Market Equilibrium and Dynamics, Inter-Market Relationships, and Price Functions in Resource Allocation

Flashcards on Market Equilibrium and Dynamics, Inter-Market Relationships, and Price Functions in Resource Allocation

Market Equilibrium

A state where the quantity of a product supplied equals the quantity demanded at a particular price.

Equilibrium Price (Market-Clearing Price)

The price at which the amount of goods buyers are willing to buy equals the amount sellers are willing to sell.

Market Disequilibrium

Occurs when the quantity supplied and quantity demanded are not equal, leading to either a surplus or a shortage.

Surplus (Excess Supply)

When supply exceeds demand at a current price, resulting in downward pressure on prices.

Shortage (Excess Demand)

When demand exceeds supply at a current price, leading to upward pressure on prices.

Law of Demand

As the price of a good decreases, the quantity demanded increases, and vice versa.

Law of Supply

Higher prices incentivise producers to supply more, while lower prices discourage production.

Equilibrium Price

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

Equilibrium Quantity

The quantity of goods or services that is bought and sold at the equilibrium price.

Demand Shifts

Occurs when the entire demand curve moves either left (decrease) or right (increase) due to factors other than the good's price.

Supply Shifts

Movement of the supply curve either to the left (decrease) or to the right (increase) due to factors other than the price of the good.

Joint Demand

The demand for multiple goods is interconnected, often due to their complementary usage.

Complementary Goods

Goods that are often used together, such that the demand for one increases the demand for the other.

Substitute Goods

Goods that can be used in place of one another, offering consumers alternatives in their consumption choices.

Derived Demand

The demand for a good or service that originates from the demand for another good or service.

Rationing Function of Price

The process by which market prices determine the distribution of scarce resources.

Signaling Function of Price

How changes in price provide information to buyers and sellers, influencing their decisions; a communication tool in the market.

Incentivising Function of Price

Motivating economic agents to modify their behaviour in response to price changes; high prices encourage increased supply, while low prices stimulate demand.