1.2.5 The determination of equilibrium market prices

Equilibrium Price

The price at which the quantity demanded equals the quantity supplied.

Market Clearing Price

The price at which all products are sold and there is no excess supply or demand.

Excess Supply

A situation in which the quantity supplied is greater than the quantity demanded at a given price.

Excess Demand

A situation in which the quantity demanded is greater than the quantity supplied at a given price.

Market Forces

Factors that affect the price of goods and services based on supply and demand.

Disequilibrium

A situation where quantity demanded does not equal quantity supplied, leading to excess demand or supply.

Shift in Demand Curve

A change in the demand for a product due to factors other than price.

Shift in Supply Curve

A change in the supply of a product due to factors other than price.

Factors Causing Shift in Demand

Changes in consumer income, tastes, prices of related goods, and advertising.

Factors Causing Shift in Supply

Changes in production costs, technology, and government policies.

Impact of Price Change

A movement along the supply or demand curve.

Impact of Non-Price Change

A shift in the demand or supply curve.

Demand Curve

A graph that shows the relationship between the price of a product and the quantity demanded.

Supply Curve

A graph that shows the relationship between the price of a product and the quantity supplied.

New Market Equilibrium

Occurs when both the price and quantity in a market adjust to changes in supply and demand.

Graphical Representation of Demand Increase

The demand curve shifts rightward, leading to a higher price and quantity.

Graphical Representation of Supply Decrease

The supply curve shifts leftward, leading to a higher price and lower quantity.

Market Equilibrium Price

The price at which the market is settled, with no excess supply or demand.

Analysis Skills - WISEAPE

A framework to analyze economic situations: W = What happens? I = Impact, S = Solution, E = Evidence, A = Alternatives, P = Prediction, E = Evaluation.

Consumer Income Impact

Changes in consumer income can lead to shifts in demand for goods and services.

Government Policy Impact

Changes in government taxation and subsidies can lead to shifts in supply.

Quick Test Definition of Market Equilibrium

Quantity demanded matches quantity supplied.

Excess Demand Graph Analysis

The difference between quantity demanded and quantity supplied at a lower price.

Excess Supply Graph Analysis

The difference between quantity supplied and quantity demanded at a higher price.

Impact of Changes on Price and Quantity

Changes in demand or supply affect market equilibrium in terms of price and quantity.

Price Adjustment Mechanism

Excess supply leads to a price decrease while excess demand leads to a price increase.

Price Elasticity of Demand

A measure of how much the quantity demanded changes in response to price changes.

Price Elasticity of Supply

A measure of how much the quantity supplied changes in response to price changes.

Impact of Technological Progress

Can lead to an increase in supply by reducing production costs.

Role of Advertising in Demand

Can shift the demand curve by influencing consumer preferences.

Consumer Tastes Effect on Demand

Changes in consumer preferences can lead to shifts in demand.

Equilibrium Changes Due to Supply Shock

Sudden supply shocks can lead to rapid changes in market equilibrium.

Subsidy Effect on Supply

Subsidies can increase supply by lowering production costs.

Indirect Tax Impact on Supply

Indirect taxes decrease supply by increasing production costs.

Market Diagram Analysis

Utilizing diagrams to examine the impact of changes in demand and supply.

Evaluating Economic Changes

Consider the magnitude and implications of changes in demand and supply.

Quick Test Explanatory Skills

Ability to explain reasoning behind answers in market equilibrium questions.

Exam Preparation Tip

Focus on understanding the relationship between price and quantity in various market scenarios.