Market equilibrium + Disequilibrium

• A market is a place where buyers meet suppliers to exchange goods and services, which can be physical like a market stall or a physical shop, or digital like Amazon or Ebay.
• Equilibrium in a free market represents allocative efficiency because at equilibrium, the resources that firms are using to make goods and services are perfectly following consumer demand.
• Even if the market is not at equilibrium, the free market has special forces that will always return the market back to equilibrium.
• The free market, also known as the price mechanism, is a mechanism where prices in a market have these special functions.
• The call function of prices is to allocate scarce resources efficiently.
• Prices signal the fact that there have been excess demands or excess supplies but they also signal the need for more or less resources in the market.
• Prices incentivize producers to increase or decrease their output in order to profit maximize.
• Prices also ration scarce Resources by encouraging or discouraging consumption.
• Excess demand can lead to firms entering the market or existing firms increasing capacity to produce more output.
• When curves are shifting, the forces of free markets and the functions of the price mechanism work together to always attain equilibrium.
• Lower prices incentivize firms to decrease their output, leading to a contraction along the supply curve.
• Excess demand can also lead to firms increasing their prices, making more profit.
• Higher prices signal the need for more resources, incentivizing firms to increase their output.
• Lower prices also ration scarce resources by encouraging consumption, leading to a contraction along the demand curve.
• Lower prices signal the fact that there has been an excess supply to both consumers and producers, and they also signal the fact that there is less need for resources in the market.
• Excess demand means there is upward pressure on prices, with prices rising from P1 to P*.
• An excess supply can lead to firms leaving the market or existing firms reducing capacity to decrease output.
• An excess supply is the opposite issue, with prices not reaching P*.