2.3 Competitive Market Equilibrium

Diagram - Market Equilibrium

Draw it (Market Equilibrium)

Market Equilibrium

Quantity demanded for a product is equal to the quantity supplied, no shortages or surpluses

Market Disequilibrium

Surplus and Shortage

Surplus

The supply of a product exceeds its demand as the price is set higher than market equilibrium

Shortage

The demand of a product exceeds its supply as the price is set lower than market equilibrium

Shift in Demand / Supply

Creates a new market equilibrium, change in amount of resources allocated

Price Mechanism

Determines what to produce

Functions of Price Mechanism

Signals and incentives to determine allocation of scarce resources (ARSI)

(A)RSI

Allocate scarce resources efficiently

A(R)SI

Ration scarce resources through encouraging / discouraging consumption

AR(S)I

Signals excess demand / supply and need for increase / decrease resources

ARS(I)

Incentives for producers to increase / decrease output to optimise profit

Diagram - Changes in Equilibrium and Role of Price Mechanism

Draw it (Changes in Equilibrium)

Consumer Surplus

Extra satisfaction gained by consumers paying a price lower than price willing and able to pay

Producer Surplus

Extra earnings gained by producer makes from a given quantity of output, more than the amount prepared to accept

Diagram - Consumer and Producer Surplus

Draw it (Consumer and Producer Surplus)

Demand curve reflects…

the marginal benefit of the consumers from consuming a good / service

Supply curve reflects…

the marginal cost of producing a good / service

Allocative Efficiency

Optimal allocation of resources according to society's point of view, allocated to the wants and needs of consumers and producers, what and how to best produce

Total Community / Social Surplus

Consumer Surplus + Producer Surplus

Welfare Loss

Occurs due to allocation of resources not at equilibrium

Extra Diagram - Welfare Loss

Draw it (Welfare Loss)

Calculate Surpluses from Diagram

Use triangles and trapeziums