WP

MARKET_EQUILIBRIUM_2022 (6)

Real-World Economic Issues

  • How do consumers and producers make choices in trying to meet their economic objectives?

  • Market Equilibrium

Key Learning Topics

  • ✔ The price mechanism

  • ✓ Market equilibrium

  • ✓ The effect of changes in demand and supply upon the equilibrium

  • The concept of excess demand and excess supply

  • ✓ Allocative efficiency

Price Mechanism

  • The system in the market economy where changes in prices in response to changes in demand and supply equalize demand and supply.

  • Example scenarios include:

    • Fabrication Maison products with varying prices (e.g., 5,90€/100 for a specific item).

Functions of Price Mechanism

  1. Signalling Function

  2. Incentive Function

  3. Rationing Function

Market Equilibrium

  • Equilibrium: A position of balance, with no inherent tendency to move away.

  • Market Equilibrium: A situation where quantity demanded equals quantity supplied (Qd = Qs).

Excess Supply (Surplus)

  • Occurs when quantity supplied exceeds quantity demanded.

  • Market price must be above equilibrium.

  • Graphical representation showing the excess supply between Qe and Q1.

Excess Demand (Shortage)

  • Occurs when quantity demanded exceeds quantity supplied.

  • Market price must be below equilibrium.

  • Graph illustrates the shortage situation between Qe and Q2.

Demand and Supply Shifts

  • Changes in demand (D to D1) and supply (S to S1) lead to new equilibrium points (Pe1 and Qe1).

  • Various illustrations display how shifts affect market price and quantity.

Consumer Surplus

  • Consumer surplus = Amount consumers are willing to pay - Actual amount paid.

  • Example: Demand for pizza illustrates the consumer surplus with specific price points leading to a surplus calculation of $3.0 from 4 slices of pizza at varying prices ($3.0, $2.0, $1.0).

Producer Surplus

  • Producer surplus = Actual revenue earned - Minimum revenue producers are willing to accept.

  • Example: For pizza sellers, producer surplus from selling 4 slices at various price points resulted in a total surplus of $6.

Allocative Efficiency

  • Achieved where marginal cost equals marginal benefit (MSC = MSB).

  • At market equilibrium (Pe=$4.0 and Qe=4), social surplus reaches its maximum.