2b the market economy

market equilibrium & disequilibrium

mkt eqm: qs = qd

diseqm:

• qs > qd: surplus

  • p inc, sellers cant sell all at P₁ so they lower p, Qd inc, Qs dec, downward pressure on p continues till eqm at P₀Q₀

• qd > qs: shortage

  • p dec, buyers cant buy all they want at P₁ so p inc, Qd dec, Qs inc, upward pressure on p continues till eqm at P₀Q₀

price mechanism in resource allocation

signalling function

• p of good provides info to pds/crs abt what’s relatively abundant/scarce

• p signals to pds to expand pdction

incentive function

• p of gd incentivises pds to allocate their resources away from pdcing gds of lower p, towards gds of higher p, so profit will increase

rationing function

• dd > ss, p of good rations resources to crs who are most willling & able to buy the gd

csr & pdr surplus

consumer surplus: diff between p crs are willing & able to pay for the gd and p they actually pay

producer surplus: diff between p pds are willing & able to accept and p they actually receive for the gd

decision making

crs will consume if MB more than/equal to MC

• irrational to consume beyond Q₀ as MC > MB

• MC is opp cost

pds will produce if MB more than/equal to MC

• irrational to consume beyond Q₀ as MC > MB

• MB is revenue

labour market

labour demand: wage rate inc, more workers want the job

labour supply: wage rate inc, less workers hired

affected by:

• working population

• barriers to entry (visa etc)

at W₀ (eqm): price at which labour is exchanged (wage rate)