Market Equilibrium, Producer and Consumer Surplus

refers to when the quantity supplied = quantity demanded

Price mechanism: refers to the market forces of supply and demand interacting to meet at market equilibrium where the rpice is determined at the point where quantity demanded = quantity supplied.

How does the price mechanism work?

For when the price is set above equilibrium:

• There will be an excess in supply

• This is dtermined where P1 intersects the Demand and Supply curve.

• P1Q1<P1Q2 therefore QD<QS

• Excess in supply (the market has not cleared)

• This prompts the seller to lower the price of the good

• This contracts supply and expands demand until market equilbrium is met.

Producer and consumer surplus:

Markets are used to organise the economy as they, through the price mechanism, create market equilbirum which stops the waste of limited resources.

A clear market refetrs to a market where what is produced = what is sold.

Consumer surplus: the willingness to pay, the actual amount consumers paid.

Producer Surplus: the actual amount they recieved, the sellers cost.

CS:

Surplus refers to how willing a customer is to pay for a good.

This means that if there willingness to pay is above market equilibrium, they will buy it and have leftover money.

PS:

When the cost of supply is lower than market equilbrium.

this means that there is a distance between the cost of production and equilbrium (on a graph).

The lower the better, a supplier does not want to be supplying/producing at a cost higher than market equilbrium.