ECON 103: Contemporary Microeconomic Principles - Equilibrium and Market Dynamics

Vocabulary practice flashcards covering market equilibrium, shortages and surpluses, algebraic solutions, supply and demand curve shifts, and gains from trade in Contemporary Microeconomic Principles.

Equilibrium

The price point at which quantity demanded equals quantity supplied ($Q_d = Q_s$), meaning buyers want to purchase exactly the amount sellers want to sell.

Market-Clearing Price

Another term for the equilibrium price ($P^*$) at which quantity demanded equals quantity supplied and no unsold surplus or unsatisfied shortage remains.

Unstable Point

Any point in a market where quantity demanded does not equal quantity supplied ($Q_d \neq Q_s$), triggering economic forces that push price and quantity back toward equilibrium.

Surplus

A market condition occurring when the price is above the equilibrium price ($P > P^*$) such that quantity supplied exceeds quantity demanded ($Q_s > Q_d$), exerting downward pressure on price.

Shortage

A market condition occurring when the price is below the equilibrium price ($P < P^*$) such that quantity demanded exceeds quantity supplied ($Q_d > Q_s$), exerting upward pressure on price.

Competition Among Sellers

The competitive interaction that takes place during a surplus where sellers undercut one another's prices to win customers, bidding the price down until $Q_d = Q_s$.

Competition Among Buyers

The competitive interaction that takes place during a shortage where buyers outbid each other to obtain limited goods, bidding the price up until $Q_d = Q_s$.

Algebraic Demand Equation

An equation expressed in the form $Q_d = a - bP$, where the negative sign reflects the law of demand stating that quantity demanded falls as price rises.

Algebraic Supply Equation

An equation expressed in the form $Q_s = a + bP$, where the positive sign reflects the law of supply stating that quantity supplied rises as price rises.

Change in Demand

A shift of the entire demand curve caused by a change in a non-price factor.

Change in Quantity Demanded

A movement along a stationary demand curve caused strictly by a change in the good's own price.

Change in Supply

A shift of the entire supply curve caused by a change in a non-price factor.

Change in Quantity Supplied

A movement along a stationary supply curve caused strictly by a change in the good's own price.

Market Impact of an Increase in Demand

A rightward shift of the demand curve that produces an initial shortage at the original price, causing buyers to bid the price up and leading to a higher equilibrium price ($P^*_1 > P^*_0$) and a higher equilibrium quantity ($Q^*_1 > Q^*_0$).

Market Impact of an Increase in Supply

A rightward shift of the supply curve that produces an initial surplus at the original price, causing sellers to lower prices and leading to a lower equilibrium price ($P^*_1 < P^*_0$) and a higher equilibrium quantity ($Q^*_1 > Q^*_0$).

Market Impact of a Decrease in Demand

A leftward shift of the demand curve that leads to both a lower equilibrium price and a lower equilibrium quantity.

Market Impact of a Decrease in Supply

A leftward shift of the supply curve that leads to a higher equilibrium price and a lower equilibrium quantity.

Consumer Surplus

The gain from trade enjoyed by buyers, defined as $\text{Willingness to pay} - \text{market price}$, represented graphically by the area above the market price and below the demand curve.

Producer Surplus

The gain from trade enjoyed by sellers, defined as $\text{Market price} - \text{willingness to sell}$, represented graphically by the area below the market price and above the supply curve.

Unexploited Gains from Trade

The lost potential welfare occurring at quantities below equilibrium ($Q_a < Q^*$) where buyers' willingness to pay exceeds sellers' willingness to sell ($\text{WTP} > \text{WTS}$), but mutually beneficial transactions fail to occur.

Value of Wasted Resources

The economic loss occurring at quantities above equilibrium ($Q_b > Q^*$) where sellers' willingness to sell exceeds buyers' willingness to pay ($\text{WTS} > \text{WTP}$), meaning produced units cost more to make than buyers value them.

Total Surplus Maximization

The condition achieved at equilibrium quantity ($Q^*$) where the sum of consumer surplus and producer surplus is maximized, leaving no unexploited gains from trade and no wasted resources.