Market equilibrium & disequilibrium

• What is a free market?

  A market free from government intervention
• What occurs at equilibrium in a market?

  Demand equals supply
• What does the term equilibrium mean in Greek?

  Balance
• What is another name for equilibrium?

  Market clearing position
• What happens in a market at equilibrium?

  The market is clear of excess demand and supply
• What does disequilibrium occur?

  When demand does not equal supply
• What do the curves in the diagrams represent?

  Demand and supply curves
• What are the equilibrium market price and quantity called?

  P star and Q star
• What does Adam Smith say about equilibrium in a free market?

  It represents allocative efficiency
• Why is equilibrium considered allocative efficiency?

  Resources match consumer demand perfectly
• What happens even if the market is not at equilibrium?

  The free market has forces to return to equilibrium
• What is another name for the free market?

  The price mechanism
• What do prices do in a market?

  They signal excess demand or supply
• How do prices incentivize producers?

  To increase or decrease output for profit
• What do prices do to scarce resources?

  They ration them by influencing consumption
• What are the functions of the price mechanism in a free market?

  • Allocate scarce resources efficiently
  • Signal excess demand or supply
  • Incentivize producers to adjust output
  • Ration scarce resources by influencing consumption
• What occurs when prices are below equilibrium?

  Excess demand or a shortage occurs
• What happens to prices when there is excess demand?

  Prices rise due to upward pressure
• What do higher prices signal to consumers and producers?

  There has been excess demand
• What do higher prices incentivize firms to do?

  Increase their output to maximize profit
• What happens when prices rise from P1 to P star?

  Supply expands along the supply curve
• What occurs when there is excess supply?

  Prices fall due to downward pressure
• What do lower prices signal to consumers and producers?

  There has been excess supply
• What do lower prices incentivize firms to do?

  Decrease their output to liquidate stock
• What happens when prices fall?

  Demand expands along the demand curve
• What is the result of the functions of the price mechanism in excess supply?

  Return to equilibrium and allocative efficiency
• What are the steps to achieve equilibrium in a free market?

  1. Identify excess demand or supply
  2. Adjust prices accordingly
  3. Incentivize producers to change output
  4. Ration resources based on new prices
  5. Achieve equilibrium at Q star
• What will be discussed in the next video?

  Shifting curves in market dynamics
• What did Adam Smith contribute to market economics?

  He introduced concepts of equilibrium and efficiency