Market Equilibrium and policy

Equilibrium price

The price at which tne quantity supplied of a good, service or resource equals the quantity demanded

• The price at which the demand and supply curves intersect

• AlsoAlso called the market clearing price

Equilibrium quantity

The quantity traded when the quantity supplued of a good, service or resource equals its quantity demanded

Shortage

A situation in which the quantity demanded is greater than the quantity supplied at the current market price

• Called excess demand

Surplus

A situation in which the quantity supplied is greater thzn the quantity demanded at the current market price

• Also called excess supply

Nonprice determinant (demand)

A characteristic of the demand for a good, service or resource other than its own price

• A change in non price determninant of demand changes the relationship between price and quatity demanded, either increasing or decreasing quantity demanded at every price

  • Also called a non-own-price determinant

Change (shift) in demand

A change in the quantity of a good, service, or resource demanded at every price

• Graphically, an increase in demand is represented by a rightward shift of the demand curve, while a decrease in demand is represented by a leftward shift of the demand curve

Price Ceiling

A maximum legal price at which a good, service, or resource

Non binding price ceiling

A maximum legal price that is set above the existing equilibrium price.

• The market equalibrium price is lower than the price ceiling therefore the ceiling has no effect on the market and is said to be nonbinding

Binding price ceiling

A maximum legal price that is set below the existing price.

• The market equilibrium price is greater than the price ceiling, the ciling then restricts trade and is said to be binding

Price Floor

A minimum legal price at which a good, service or resource can be sold

Nonbinding price floor

A minimum legal price that is set below the existing equilibrium price

• The equilibrium price is greater than the price floor, the floor therefore has no effect on the market and is said to be nonbinding

Binding price floor

A minimum legal price that is set above the existing equilibrium price

• The market equilibrium price is lower than the price floor, the floor restricts trade and is said to be binding
  

Minimum wage

The lowest wage firms can legally pay employees in the labor market

Excise tax

A tax based on the number of units purchased, not on the price paid for a good or service