4.1.3.5 The determination of equilibrium market prices

What is market equilibrium also known as?

Market equilibrium price is also known as the market clearing price

When is a market at equilibrium?

A market is at equilibrium when supply and demand are equal

What is market equilibrium also known as?

Market equilibrium price is also known as the market clearing price

When is a market at equilibrium?

A market is at equilibrium when supply and demand are equal

What describes the condition of market equilibrium?

When the market is at equilibrium, all products that are presented for sale are sold and the market is cleared. There's no surplus (extra supply) and no shortage (excess demand). It usually occurs at the equilibrium price — the price at which buyers are willing to buy exactly as much as sellers are willing to sell.

What has no tendency to change when at market equilibrium and what is this known as?

Price has no tendency to change (the current market price of a good or service is stable and is not expected to move upwards or downwards as the forces of supply and demand are currently balanced, creating a state of market equilibrium). This is known as the market clearing price.

Where can the equilibrium point be found? What does it mean regarding price and quantity demanded and quantity supplied?

The equilibrium point can be found where the supply curve and demand curve meet. The amount of the product that consumers want to buy (quantity demanded) is equal to the amount producers want to sell (quantity supplied).

What is a free market?

A free market is an economic system where the prices of goods and services are determined by supply and demand with little or no government control

What does supply and demand determine in a free market?

Supply and demand determines equilibrium price and the allocation of resources. This free interaction of supply and demand is known as market forces.

When does disequilibrium occur?

Disequilibrium occurs when there's an imbalance between supply and demand, meaning the quantity supplied does not equal the quantity demanded at the current price.

When does excess supply occur?

Excess supply occurs when the quantity supplied to a market is greater than the quantity demanded

When does excess demand occur?

Excess demand occurs when the quantity demanded in a market is greater than quantity supplied

When are new market equilibriums established?

New equilibriums are established when the demand or supply curves shift due to PASSIFIC or PINTSWIC reasons

What will be affected if the demand curve shifts?

If the demand curve shifts, the quantity and equilibrium price will be affected. If the demand curve shifts to the right, the equilibrium price and quantity will increase. If the demand curve shifts to the left, the equilibrium price and quantity will decrease.

What will be affected if the supply curve shifts?

If the supply curve shifts, the quantity and equilibrium price will be affected. If the supply curve shifts right (increase in supply), the equilibrium price will decrease, and the equilibrium quantity will increase. If the supply curve shifts left (decrease in supply), the equilibrium price will increase, and the equilibrium quantity will decrease.

What affects the point of the new equilibrium?

The new point of equilibrium is affected by price elasticity of demand and price elasticity of supply. These influences the size of change in the equilibrium price and quantity caused by supply and demand curve shifts.

i.e. If the demand curve shifts to the right along an elastic supply curve, this will have a larger effect on quantity than price. The opposite is true for an inelastic supply curve.

What are the assumptions of the demand and supply curve model?

Ceteris Paribus: Allows economists to isolate the effect of price changes on demand and supply, while ignoring the influence of other factors that might also affect these quantities.

Perfectly Competitive Market: The model assumes a market with many buyers and sellers, all of whom are price takers (they cannot influence the market price).

Rational Decision-Making: Both consumers and producers are assumed to make rational decisions based on their own self-interest, trying to maximise their utility (consumers) or profits (producers).

Symmetric Information: It's assumed that both buyers and sellers have complete and accurate information about the market.

Constant Tastes and Income: The model assumes that consumer tastes and preferences, as well as their income levels, remain constant.

No Externalities: The model generally assumes that there are no externalities (costs or benefits that affect third parties not directly involved in the transaction).