Topic 10: Market equilibrium

• A market is defined as a place where a group of buyers and sellers interact with each other for the purpose of buying and selling a particular good or service.
• In the free market system resources are allocated by the price mechanism.
• Price will adjust until quantity demanded equals quantity supplied, this is known as equilibrium price and quantity, market price or market clearing price.
• The aim of the consumer is to maximize satisfaction, but the aim of the producer is to maximize profits.
• Market equilibrium occurs at the point where the motives of both producers and consumers coincide.
• When the supply and demand curves intersect, the market is in equilibrium.
• The equilibrium price is the price at which the quantity demanded equals the quantity supplied.
• Equilibrium quantity is the quantity bought and sold at the equilibrium price.
• Market equilibrium can be represented diagrammatically as the point where the demand and supply curves intersect.
• Market disequilibrium is said to exist when there is inequality between quantity demanded by consumers and quantity supplied by producers.
• There are two types of market disequilibrium: surpluses or excess supply and shortages or excess demand.
• A situation in which producers are willing to sell more than consumers are willing to buy is known as a surplus or excess supply.
• A situation in which consumers are willing to buy more than producers are willing to sell is known as a shortage or excess demand.
• Market prices frequently adjust in response to changes in demand and supply by the respective economic units.
• There are four possibilities in which market prices can respond to changes in either demand and supply: increase in demand, decrease in demand, increase in supply, and decrease in supply.
• Demand shifts outwards to the right and supply remains constant, resulting in a shortage.
• Consumers are willing to pay more so suppliers increase price, resulting in an increase in quantity supplied at the higher equilibrium price.
• Demand shifts inwards to the left and supply remains constant, resulting in a excess supply.
• In times of famine or war, the government may set maximum price on basic food items so that people can afford these items.
• The effect of a Price Ceiling on consumer and producer surplus is that price falls so producer surplus falls and consumer surplus increases, but both the consumer and producer lose as there is deadweight loss.
• Producer surplus is the difference between what producers are willing and able to sell a good for and the price they actually receive.
• To solve for equilibrium price and quantity, write equation so they both equal, set Qs (quantity supplied) equal to Qd (quantity demanded), solve for P, this is going to be your equilibrium Price for the problem, and then plug your equilibrium price into either your demand or supply function (or both--but most times it will be easier to plug into supply) and solve for Q, which will give you equilibrium quantity.
• The level of producer surplus is shown by the area above the supply curve and below the market price.
• Price floor, also known as minimum price, is a price set by the government below which prices do not expect to fall.
• Ceilings are usually set below equilibrium and therefore, result in shortages.
• Price ceilings are usually set above market prices and act as a safe guard mechanism to ensure a fair return on the goods or services.
• Price floors are generally set above market prices and act as a safe guard mechanism to ensure a fair return on the goods or services.
• Price floor or minimum price can cause unemployment as producers may not be efficient as they are unable to make a profit.
• The effect of a Price Floor on consumer and producer surplus is that price increases so consumer surplus falls and producer surplus increases, but both the consumer and producer lose as there is deadweight loss.
• Price floor is the maximum price set by the government to prevent prices from rising above a certain level.
• Price ceiling, also known as maximum price, is a price set by the government below which prices do not expect to fall.
• Large decrease in supply and small decrease in demand.
• Supply shifts outwards to the right and demand remains constant, resulting in a excess.
• Government intervene with equilibrium prices for the following reasons: affordability and maintenance of income.
• The demand and supply curves shift to the left, resulting in a shortage.
• The great increase in demand has caused prices to increase.
• An increase in demand has led to an increase in price causing suppliers to supply more at a higher price and vice versa.
• Decrease in Supply: Richelle, price 30, supply 10, quantity 14.
• These controls may take the form of: price ceiling.
• The demand and supply curves shift to the right, resulting in a shortage.