2.3 Competitive Market Equilibrium

What is competitive market equilibrium?

The equilibrium that emerges at the point where the demand curve intersects the supply curve in a free competitive market (with no government intervention.) when quantity demanded is equal to quantity supplied and there is no tendency for the price to change.

What are price mechanisms and their functions?

* Resource allocation: allocates scarce resources
* Signalling: In the event of asymmetric information this is a method used by the seller when the seller has more information, which attempts to convince the buyer that the product is of good quality; for example use of warranties or establishment of brand names. When a changing price in a market sends important information to both producers and consumers.
* Incentive: As incentives, price motivate decision-makers to respond to information. When the price of a product rises, quantity supplied increased. Price seen as incentive.

What is rationing?

price serves to ration scarce resources when demand outstrips supply. A way of allocating scarce goods and services when market demand exceeds available supply.

What is market disequilibrium?

excess demand/ supply and forces of demand and supply causes price to change until market reaches equilibrium.

What is a shortage?

 (excess demand) -> rightward shift of demand or leftward shift of supply (below equilibrium)

What is a surplus?

(excess supply) -> rightward shift of supply or leftward shift of demand (above equilibrium)

Why is supply = marginal cost?

Since marginal cost increases as the quantity of a good produced increases, producers will be willing to produce and sell an extra unit of the good only if price increases.

Why is demand = marginal benefit?

What is social/ community surplus?

the sum of consumer and producer surplus at a given price and quantity in a market (this is also social welfare is maximum). This means that the markets are achieving allocative efficiency, producing the quantity of goods mostly wanted by society - society is making the best possible use of its scarce resources.

At MB = MC, market equilibrium and social surplus is at a maximum

What is allocative efficiency?

An allocation of resources that results in producing the combination and quantity of goods and services mostly preferred by consumers.

What is consumer surplus & how is it calculated?

 when the price that consumers pay for a product or service is less than the price they're willing to pay. It's a measure of the additional benefit that consumers receive because they're paying less for something than what they were willing to pay.

(Calculation: area between price demanded and price at equilibrium)

What is producer surplus and how is it calculated?

the difference between how much a person would be willing to accept for a given quantity of a good versus how much they can receive by selling the good at the market price. the benefit the producer receives for selling the good in the market.

(Calculation: area between quantity supplied and price equilibrium)