Module Notes: Market Equilibrium and Forces

Exam Information

The exam will be administered on Canvas, but students are required to take it in person.
There will not be any questions requiring students to graph things on paper.

In general, there are two primary organization options for economies:
- Planning Economy: Characterized by centralized decision-making. Decisions, such as comparing price with marginal benefit for consumer buying, might be centrally determined.
- Market Economy: Operates based on individual transactions and decisions. This is the foundation for models like how a family's budget works.
While some countries historically had planned economies (e.g., China), many are transitioning or have transitioned towards market economies, though some traditional elements might persist.

Even with government regulation, a market can still function as a market economy.
Scenario: A factory owner in a country with carbon regulations must participate in a carbon market.
Mechanism: The government establishes the carbon market, but the actual trading and transactions (e.g., buying and selling carbon credits) are decided by each individual participant (companies) in the market.
Classification: This is considered a market economy because individual entities make transactional decisions, even though the market itself was created and regulated by the government.

Definition: Market equilibrium occurs when the quantity demanded (amount consumers are willing and able to buy) is exactly equal to the quantity supplied (amount producers are willing and able to sell) at a specific price.
Equilibrium Price: Based on given data, the market equilibrium is stated to happen at a price of 3 dollars.
Movement Towards Equilibrium: If a market is not in equilibrium, some of the market agents, either the buyer or the seller, are going to act pushing this market status towards the equilibrium. There is an inherent force that moves the market back to this stable state.

Definition: A surplus occurs when the market price is higher than the equilibrium price.
Example: If the price is set at 4 dollars, instead of the equilibrium price of 3 dollars, there will be a surplus.
- At this higher price (4), production becomes more profitable, leading to more suppliers willing to supply a higher quantity (increased quantity supplied).
- However, consumers are likely to demand less at a higher price.
Consequence: Quantity supplied will exceed quantity demanded, creating an unmatched quantity of goods.
Market Force: In the presence of a surplus, there will be a force pushing the price down.
- Seller's Action: If suppliers cannot sell 100\% of their products at the current high price, they will initiate price reductions (e.g., offering discounts to consumers) to sell more, thus pushing the market price downwards towards equilibrium.

Definition: A shortage occurs when the market price is lower than the equilibrium price.
Example: Any price below 3 dollars (the equilibrium price in this case) will generate a shortage.
Consequence: More quantity will be demanded than supplied at this lower price.
Market Force: In the presence of a shortage, there will be a force pushing the price up, as consumers compete for limited supply.

General Prediction: Any price above the equilibrium price (e.g., 3 dollars) will generate a surplus, and any price below it will generate a shortage.
Cost of Price Fixing: In a market with many participants, it is too costly to do for a single group or seller to fix prices. A seller would have to negotiate with millions of other sellers, which is practically impossible.
Tendency Towards Equilibrium: If the market doesn't have the change in tendency in change, meaning if the price is fixed at a non-equilibrium level, market forces will act upon it until it returns to equilibrium.
- If the price stays at 3 dollars (assuming this is a non-equilibrium state in a hypothetical scenario where demand changed, causing 3 to be above the new equilibrium), a surplus could occur.
- If the demand curve shifts (e.g., lower demand), and the price remains at 3 dollars, the price will now intersect with the new demand at a lower quantity, resulting in a surplus which pushes prices down.