3.1.2.5 THE DETERMINANTS OF EQUILIBRIUM MARKET PRICES

What does market equilibrium mean, in basic terms?

Supply = demand

What is equilibrium defined as? (In terms of demand and supply)

Equilibrium is defined as the price and quantity at which supply = demand. Hence a market is in equilibrium, the market clears and there is no tendency for change

When planned demand < planned supply, what happens to the price?

Price falls

When planned demand > planned supply, what happens to the price?

Price rises

Define equilibrium

A state of rest or balance between opposing forces

Define disequilibrium

A situation in which opposing forces are out of balance

Define market equilibrium

A market is in equilibrium when planned demand equals planned supply. Where the demand curve crosses the supply curve

Define market disequilibrium

Exists at any other price other than the equilibrium price, when either planned demand < planned supply or planned demand > planned supply

What is inelastic demand?

Wen consumers are not very responsive to price changes

When prices increase on a relatively price inelastic demand and supply curve, what happens to quantity? (In terms of supply and demand)

• a small decreases in quantity demanded

• a small increase in the quantity supplied

Why do businesses increase prices and supply more?

The majority of businesses are profit maximizers

So higher prices = higher potential revenue/profit

What does excess demand mean?

Excess demand occurs when the quantity demanded is greater than thr quantity supplied at a given price

When does excess demand usually occur? Why is this?

When the price is below the equilibrium price

When the price is low - consumers want to buy more, producers are willing to supply less, demand exceeds supply

What do you say, when the price decreases?

The market clears

What are some reasons for a shift in supply?

• changes in production costs

• technological improvements

• taxes or subsidies

• number of firms

What is the new equilibrium called?

The new clearing price

Where would excess supply be?

From Q1 to Q3

An increase in supply, means what for prices and quantity?

Prices decrease

Quantity increase (demand and supply)

An increase in demand, means what for prices and quantity?

Prices increase

Quantity increases (demand) (and a movement along the supply curve)