Détermination of equilibrium market prices

Equilibrium

Equilibrium - a state of rest or balance between opposing forces 

Disequilibrium

Disequilibrium - a situation in a market when there is excess supply or excess demand

Market equilibrium

Market equilibrium - a market is in equilibrium when planned demand = planned supply and the demand crosses the supply curve. In this situation there is no excess demand or excess supply in the market. Unless some event disturbs the equilibrium, there is no reason for the price to change

Market disequilibrium

Market disequilibrium - exists at any price other than the equilibrium price. WHen the market is in disequilibrium, either excess demand or excess supply exists in the market. Excess demand causes the price to rise until a new equilibrium is established. Conversely, excess supply causes the market price to fall until equilibrium is achieved. 

Excess supply

Excess supply - when firms wish to sell more than consumers wish to buy, with the price above the equilibrium price

Excess demand

Excess demand - when consumers wish to buy more than firms wish to sell, with the price below the equilibrium price

Joint supply

Joint supply - when one good is produced, another good is also produced from the same raw materials. A rise in the price of the first good (caused by a right shift in demand) leads to a shift in the supply curve of the other good in supply (rightwards)

Competing supply

Competing supply - when raw materials are used to produce one good they cannot be used to produce another good

Complementary good

Complementary good - a good in joint demand, or a good which is demanded at the same time as the other good

Substitute good

Substitute good - a good in competing demand, namely a good which can be used in place of the other good

Composite demand

Composite demand - demand for a good which has more than one use

Derived demand

Derived demand - demand for a good which is an input into the production of another good

Speculative demand

Speculative demand:

When speculators think the price of copper is going to rise, probably in conditions of increasing global demand and limited supply they step into the market and buy copper. If speculative demand is large enough, the speculators themselves force the price up. 

Commodity

Commodity - a raw material or primary agricultural product that can be bought and sold

Global commodity prices move in long cycles or super cycles that last typically for 20-30 years. 

Consumer durable

A car is a consumer durable good, delivering a constant stream of consumer services throughout its life. When the economy booms, demand for new cars is high and a constant supply of second hand cars is released onto the market as new-car owners replace their cars. In these conditions, excess supply means second hand car prices fall, relative to the prices of new cars, however not inevitable as strong economy may also boost demand for second hand cars

In a recessionary period new car owners may hang onto their cars for longer before they sell them - decreasing supply, demand for second hand cars may also fall as consumers can’t afford them 

A rise in house prices can trigger a speculative bubble in the housing market. Rising prices drive up demand causing a further rise in prices.

Allocative efficiency

Allocative efficiency - occurs when the available economic resources are used to produce the combination of g/s that best matches people’s tastes and preferences

Productive efficiency

Productive efficiency - for the economy as a whole occurs when it is impossible to produce more of one good without producing less of another. For a firm it occurs when the average total cost of production is minimised. 

Merit good

Merit good - a good which when consumed leads to benefits which other people enjoy, or a good for which the long term benefits of consumption exceeds the short-term benefit enjoyed by the person consuming the merit good. Whether a good should be regarded as a merit good, depends on the value judgements being made. 

In a market environment people can demonstrate their preferences for different g/s by exercising choice. This generates precise info about their preferences, so providers are motivated to supply the services people want, improving allocative efficiency. Markets also create the incentive for providers to be as efficient as possible in order to undercut competitors improving productive efficiency.