Economics- Chap 7

What is equilibrium?

What is equilibrium?

Refers to a state of rest in the absense of any outside disturbance, in economics it occurs wen supply and demand are equal

What is the market clearing price?

is the price at which equilibrium occurs because everything produced will be sold tus clears the market.

what is excess supply?

exists when there is more of a good being supplied at a given price than it is being demanded

occurs when producers raise the price above the equilibrium

• Also called producer surplus

How to eliminate excess supply?

• producers will need to lower their prices and as they do so, the quantity demanded will rise while the supplied quantity will fall, this process will continue until the market reaches equilibrium once again.

what is excess demand?

when more of a product is being demanded than there is supplied

• occurs when the price is set below the equilibrium.

• Also called a shortage

how to eliminate excess demand?

Producers will need to raise their prices until the demand falls and supply rises until equilibrium is reached once again.

how does equilibrium change?

It changed when there is a change of any determinant of supply or demand

Give an example of equilibrium changing/one of the determinants

When income rises, there can be a change in demand for holidays causing an excess demand, to eliminate this the price must rise until the demand drops to the point where the new equilibrium is reached cetris paribus

Name the price mechanisms

• the signalling function

• the rationing function

• the incentive function

function of the signalling function

prices are set by actions of consumers and producers, so they reflect the changing circumstances in markets

• price acts as a signal to those in the market to act some way

function of the rationing function

prices help allocate and ration scarce resources

• if the demand for a good is significantly greater than the supply, prices will be relatively high and the low supply will be rationed to those who are willing to pay the price.

function of the incentive function

Prices act as incentives for producers and consumers

• lower prices give consumers and incentive to buy more of a good because they will receive more utility (satisfaction) from the good of the money spent

• higher prices will act as a disincentive since the utility in relation to the money spent will fall.

what does a higher price mean for producers

It will give them an incentive to produce more of the good

• is there is an increase in price due to the increase in demand of the good it gives a sign to producers that consumers wish to buy more of this good.

what is consumer surplus?

The extra satisfaction gained by consumers from paying a proce that is lower than that which they are prepared to pay.

• meaning a consumer would have payed a higher price for a certain product but they get to pay less meaning they are saving money.

What is producer surplus?

The excess of actual earnings that a producer makes from a given quantity of output, over and above the amount the producer would be prepared to accept for that output

• meaning the producer saves money seeing as they would have also been okay for settling with a lower price for the same output but don’t have to.

what is allocative efficiency?

When a market is in equilibrium with no external influences or effects.

What does it mean for allocative efficiency to exist?

• The resources are allocated in the most efficient way

• providing maximum output

What is community surplus

The sum of the consumer and producer surplus during equilibrium - total benefit to society

When is community surplus maximised

at equilibrium.

what are marginal social cost

the cost that society pays as a result of the production of additional units or utilization of a good or service.

What are marginal social benefits

the satisfaction experienced by consumers of a specific good plus or minus the overall environmental and social costs or benefits.

What is a free market?

Based off of the laws of supply and demand equilibrium will be reached by itself without any government intervention.