Market Equilibrium, Surplus, and Supply/Demand Fundamentals (Lecture Notes)

flashcards covering the concepts of supply, demand, equilibrium, surpluses, and related market dynamics from the lecture notes.

What is the law of supply and why does the quantity supplied rise when price rises?

The positive relationship between price and quantity supplied; as price increases, rational producers allocate more resources to production because the benefits exceed opportunity costs.

What is the difference between quantity supplied and supply?

Quantity supplied is a point on the supply curve at a given price; supply is the entire supply curve showing quantities offered at all prices.

How is the market supply curve formed?

By horizontally summing the individual supply curves of all suppliers at each price.

Name key factors that can shift the supply curve.

Input prices, technology, expectations, and the number of sellers.

What happens to supply when input prices rise?

Supply shifts to the left (decreases) because higher input costs make production less profitable.

How can technology affect supply?

Technological improvements that reduce costs shift the supply curve to the right, increasing supply.

What effect do expectations about future prices have on current supply?

If higher future prices are expected, producers may restrict current supply to stockpile for higher prices later.

What effect does the number of sellers have on supply?

More sellers increase market supply; fewer sellers decrease supply.

What is market equilibrium?

The price-quantity combination where market supply equals market demand; the market tends to move toward this point.

What is a shortage, and when does it occur?

When the price is below equilibrium; quantity demanded exceeds quantity supplied, leading to queues and upward pressure on price.

What is consumer surplus?

The net benefit to buyers; the area under the demand curve and above the market price, equal to willingness to pay minus price for each buyer.

What is producer surplus?

The net benefit to sellers; the area above the supply curve and below the market price, reflecting price minus marginal cost for each unit.

What is total surplus and what does Pareto efficiency mean in this context?

The sum of consumer and producer surplus; maximum total surplus is Pareto efficient—no one can be made better off without making someone else worse off.

How can total surplus be illustrated graphically?

Total surplus equals the area between the demand and supply curves up to the equilibrium quantity; consumer surplus is the area under the demand curve above price, producer surplus is the area above the supply curve below price.

In the gasoline market example, what is the market equilibrium price and quantity?

Equilibrium price is $2.50 per gallon and equilibrium quantity is 10,000 gallons per month.

What happens if the price is above equilibrium?

A surplus (excess supply); suppliers lower prices to attract buyers until the price moves back toward equilibrium.

What happens if the price is below equilibrium?

A shortage (excess demand); buyers bid up prices, encouraging more production until the price reaches equilibrium.

In the Bruce Springsteen concert example, what is the consumer surplus at a ticket price of $60?

With Barb valuing the ticket at $100, Bob at $80, and Sharon at $70, and Steve not buying at $60, the total consumer surplus is $70 (Barb $40, Bob $20, Sharon $10).