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.