2.5 Market Equilibrium

• What is the interaction of demand and supply in a market?

  It determines equilibrium price and quantity.
• What is the equilibrium price in a market?

  It is where quantity demanded equals quantity supplied.
• What does S1 = D1 at P1 Q1 signify?

  It indicates equilibrium quantity traded.
• What is a market?

  It is where buyers and sellers exchange goods.
• What does the term 'invisible hand' refer to?

  It describes self-interested agents allocating resources.
• What is allocative efficiency in a market?

  It occurs when quantity demanded equals quantity supplied.
• What is consumer sovereignty?

  It is when consumer preferences dictate production.
• What happens at the market clearing equilibrium price?

  Quantity demanded equals quantity supplied.
• What are the functions of prices in a free market?

  They signal, ration, and provide incentives.
• What occurs when there is excess supply in a market?

  Prices are forced down due to surplus.
• What is market equilibrium?

  It is when demand equals supply at a price.
• What does a shift in the supply curve indicate?

  It shows a change in supply conditions.
• What is ceteris paribus?

  It means all other things being equal.
• What happens when consumer preferences change positively?

  Demand for the product increases.
• What is the effect of price inelastic supply on equilibrium price?

  Equilibrium price rises more than quantity.
• What occurs when demand falls due to negative consumer preferences?

  There is excess supply at the original price.
• What happens when costs of production fall?

  Supply of the product increases.
• What are the key terms related to market dynamics?

  • Market: Interaction of buyers and sellers.
  • Ceteris paribus: All other things being equal.
  • Market equilibrium: Quantity demanded equals quantity supplied.
  • Market disequilibrium: Quantity demanded does not equal quantity supplied.
  • Price mechanism: Prices signal information and allocate resources.
• What are the changes that can affect market equilibrium?

  • Changes in demand or supply.
  • Shifts in demand or supply curves.
  • Price elasticity of demand and supply.
  • Economic consequences of shifts.
• What are the effects of changes in demand on equilibrium?

  • Increase in demand leads to higher prices.
  • Decrease in demand leads to lower prices.
  • Price inelastic supply affects price more than quantity.
  • Price elastic supply affects quantity more than price.
• What are the effects of changes in supply on equilibrium?

  • Increase in supply leads to lower prices.
  • Decrease in supply leads to higher prices.
  • Price inelastic supply affects price more than quantity.
  • Price elastic supply affects quantity more than price.
• How do changes in consumer preferences affect the market?

  • Positive changes increase demand.
  • Negative changes decrease demand.
  • Affects equilibrium price and quantity.
  • Influences resource allocation in production.
• How does the price mechanism function in a market?

  • Signals information to economic agents.
  • Rations scarce resources among competing uses.
  • Provides incentives for buyers and sellers.
  • Adjusts to changes in supply and demand.
• What are the consequences of market failures?

  • Inefficient resource allocation.
  • Loss of consumer and producer surplus.
  • Distorted prices and market signals.
  • Need for government intervention.
• What does ceteris paribus assume in market analysis?

  All other factors remain constant
• What happens to equilibrium price when demand falls and supply is price inelastic?

  Equilibrium price falls more than quantity
• How does price elastic supply respond to a fall in demand?

  Equilibrium quantity falls more than price
• What occurs when production costs fall for vegetable oil?

  • Supply increases, shifting right (S1 to S2)
  • Excess supply at initial price (Qs > Qd)
  • Price decreases (P1 to P2)
  • Quantity consumed increases (Q1 to Q2)
  • Market clears at new lower price (P2) and higher quantity (Q2)
• What is the effect of price inelastic demand when supply increases?

  Price falls more than quantity increases
• What happens when demand is price elastic and supply increases?

  Quantity rises more than price falls
• What occurs when production costs rise for vegetable oil?

  • Supply decreases, shifting left (S1 to S2)
  • Excess demand at initial price (Qd > Qs)
  • Price increases (P1 to P2)
  • Quantity consumed decreases (Q1 to Q2)
  • Market clears at new higher price (P2) and lower quantity (Q2)
• What is the impact of price inelastic demand when supply falls?

  Price rises more than quantity falls
• How does price elastic demand react to a fall in supply?

  Quantity falls more than price rises
• What are the determinants of demand?

  • Price of the good
  • Income (normal vs. inferior)
  • Price of other goods (substitutes and complements)
  • Tastes and preferences
  • Expectations of future price changes
  • Time
  • Other factors (demographics, season changes)
• What are the determinants of supply?

  • Price of the good
  • Cost of factors of production
  • Productivity of factors of production
  • (Indirect) taxes and subsidies
  • Seasonal changes
  • Technology
  • New firms entering the market
  • Prices of other goods
  • Time
• What are the determinants of price elasticity of demand?

  • Availability of substitute goods
  • Time period under consideration
  • Necessities and addictive goods
  • Proportion of total expenditure
• What are the determinants of price elasticity of supply?

  • Availability of stocks/spare capacity
  • Availability of factors of production
  • Time period under consideration
• What happens when a price ceiling is set above the market clearing price?

  Excess demand occurs due to lower supply
• What does Dr. Ha-Joon Chang argue about free markets?

  He argues that free markets are a myth
• What is the significance of the video by AC/DC Economics?

  It reviews market equilibrium and surpluses