3.4 Market Equilibrium

What is the equilibrium price?

The price at which quantity demanded equals quantity supplied.

What is the equilibrium quantity?

The amount of a product bought and sold at the equilibrium price.

What happens at the equilibrium point?

There is no shortage or surplus; the market is “in balance.”

What causes the market to reach equilibrium?

The interaction of buyers' and sellers' decisions in a competitive market.

What happens at a price above equilibrium?

Quantity supplied exceeds quantity demanded → surplus.

What happens at a price below equilibrium?

Quantity demanded exceeds quantity supplied → shortage.

How do surpluses affect price?

Surpluses drive prices down.

How do shortages affect price?

Shortages drive prices up.

Why is market equilibrium considered an emergent property?

It arises spontaneously from uncoordinated individual decisions.

What metaphor did Adam Smith use to describe market coordination?

The “invisible hand.”

What does the concept of emergent equilibrium suggest?

Markets synchronize supply and demand without central planning.

What is the rationing function of prices?

The ability of prices to balance buying and selling decisions.

What does the equilibrium price ensure for buyers?

Only those willing and able to pay the price obtain the product.

What does the equilibrium price ensure for sellers?

Only those willing and able to sell at that price will sell their product.

What is productive efficiency?

Producing goods in the least costly way using optimal resources.

Why is productive efficiency important?

It frees up resources to produce other valuable goods.

What is allocative efficiency?

Producing the mix of goods most valued by society.

What does allocative efficiency ensure?

Resources are assigned to their most socially beneficial uses