Competitive Market equilibrium

Unit 2, Microeconomics

Market

Any arrangement where buyers and sellers interact to carry out an economic transaction

which tends to involve the exchange of a certain quantity of a good or service at a certain

price.

Equilibrium (in a market)

A state of balance (in a market) that is self-perpetuating in the absence of any outside

disturbance (such as changes in non-price determinants), ceteris paribus.

Market equilibrium

In a market this occurs at the price where the quantity of a good or service demanded is

equal to the quantity supplied of that good or service over a particular period of time. This

is the market clearing price since there is no excess demand or excess supply. This is

illustrated on a diagram as the intersection of the demand and supply curve.

Competitive market

A market with many firms acting independently where no firm has the ability to control the

price. Firms are assumed to be price takers as they are too small to have an impact on

the market price.

Competitive market equilibrium

Occurs in a perfectly competitive market, when quantity demanded is equal to quantity

supplied of a particular good or service over a certain period of time at a particular price.

Individual firms will sell their quantities of this good at this price.

Market mechanism

The system in which the forces of demand and supply determine the price of a particular

good or service and the market quantity. Also known as the price mechanism.

Price mechanism

The system where the forces of demand and supply determine the price of a particular

good or service and the market quantity. Also known as the market mechanism.

Shortage

Arises when the quantity demanded of a good or service is more than the quantity

supplied at a particular price over a certain period of time. Also referred to as excess

demand.

Excess demand

Occurs when quantity demanded of a good or service is more than the quantity supplied

at a particular price over a certain period of time. Also referred to as a shortage.

Excess supply

Occurs when the quantity supplied of a good or service is larger than the quantity

demanded at a particular price over a certain period of time. Also referred to as a surplus

Surplus

This term has many different meanings / uses. Relating to a market equilibrium, it is the

situation when the quantity supplied of a good or service is larger than the quantity

demanded at a particular price over a certain period of time. Also referred to as excess

supply.