price mechanism and determination

• The equilibrium is the point where the demand curve meets the supply curve.
• The market price is unstable when there is excess demand or supply. Excess supply will force producers to cut prices to encourage consumers to buy their products, while excess demand will signal to producers that they can generate more profit by increasing their prices.
• The model of equilibrium suggests perfect competition, where all consumers have access to the same products and information. It also assumes independence between supply and demand.
• Higher price levels are more profitable for producers, so supply increases.
• The price of a good/service is the value it's exchanged at. The price mechanism involves using the invisible hand to achieve an efficient allocation of resources. It delivers allocative efficiency.
• Consumer and producer surplus is the benefit that goes to different economic agents as a result of buying and selling goods in the market.

  A) consumer

  B) producer

  
• Buyers and sellers in a market agree upon a price, sometimes called the market price, for goods and services
• Equilibrium price is where demand equals supply, or where the supply and demand curves cross one another
• Excess demand occurs when demand is greater than supply, leading to a shortage of products on the market
• At equilibrium, there is neither an excess of supply nor demand; the equilibrium price is also known as the market-clearing price
• Market forces push price towards market equilibrium, where demand equals supply
• Changes in either demand or supply lead to a new equilibrium price
• If the price rises, demand falls and supply rises, creating excess supply; if the price falls, demand rises and supply falls, creating excess demand
• Reasons for excess demand include a decrease in taxes or a change in consumer trends, which incentivize producers to increase the price, decreasing demand
• Reasons for excess supply include an increase in production due to improved technology or an increase in the price of a good or service, which incentivize producers to decrease the price, increasing demand
• Consumer surplus is the difference between the price a consumer is willing to pay for a product and the price they actually pay
• If a firm reduces the price, quantity demanded will increase, enlarging the consumer surplus
• If the demand curve shifts outwards, there will be an increase in consumer surplus and vice versa
• If the price falls, quantity supplied decreases, reducing producer surplus
• If the price rises, quantity supplied increases, growing the producer surplus
• If the supply curve shifts outwards, the producer surplus will increase and vice versa
• Allocative efficiency occurs when consumer satisfaction is maximised in the production of goods and services. at this point, quantity supplied will equal quantity demanded. Productive efficiency occurs when no additional output can be produced from the factor inputs available at the lowest possible unit cost. Economic efficiency occurs when we have productive and allocative efficiency at the same time.
• Interactions between supply and demand determine the price and how much is bought and sold
• If many consumers demand a good but its supply is scarce, prices will be high and limited supply will be rationed to buyers willing to pay a high price
• If demand is low compared to high supply, prices will be low to attract more buyers
• A fall in supply leads to higher equilibrium prices and lower equilibrium quantity
• Prices act as signals in the market, influencing decisions about buying and selling
• A fall in price might signal consumers to buy more of a good or service
• Higher prices motivate producers to increase supply due to greater contribution per unit
• Low prices incentivize buyers to purchase more goods, while higher prices discourage buying but encourage suppliers to sell more
• Low prices discourage production
• Lower prices encourage consumers to buy more of a product, leading to an increase in demand
• Price has three important functions in allocating resources in a market:

  • a rationing function, which occurs because increased demand or reduced supply of a product leads to a rise in price.
  • a signalling function, which occurs because changing prices gives a signal to consumers and producers as to whether to leave or enter a market.
  • an incentive function, which occurs because a consumer or producer is motivated to a course of action.
• In a perfectly competitive market, the price mechanism ensures that all factors of production are allocated efficiently between different uses. The price mechanism does this by ensuring that the marginal cost of using any factor of production equals its opportunity cost.
• If there are too many goods being produced compared with what people want to buy, then the price will be high enough to reduce the amount that firms produce. If there are not enough goods being produced, then the price will be low enough to stimulate firms into producing more.
• The price mechanism refers to the way price changes in response to changes in supply or demand, so that a new equilibrium position is reached.
• The rationing function of the price mechanism allocates scarce goods and services to those who are willing to pay the most for them.
• Deadweight loss is calculated by the equation:

  ((new price - old price)x(old quantity - new quantity))/2