Determination of equilibrium prices

• what is equilibrium?

  where quantity demand = quantity supplied
• what is disequilibrium?

  when supply and demand no longer equal each due to demand / supply be greater or lower
• what causes shortages ?

  excess demand as the quantity demanded exceeds the quantity supplied due to the price of the product being below the equilibrium point
• how can excess demand be corrected so the economy returns to equilibrium?

  firms will increase their prices without losing sales which causes a contraction in demand and supply will increase again = market will return to equilibrium = price will reach the market clearing price ( usually P1)
• what causes surplus?

  excess supply as the quantity supplied is greater than the quantity demanded due to the price of the product being above the equilibrium point
• how can excess supply be corrected so the economy returns to equilibrium?

  firms will reduce their prices (not below equilibrium) in attempt to sell their goods which reduces supply and causes an expansion in demand = market returns to market clearing price
• when do new equilibrium points occur?

  changes in demand or supply
• What is a Market?

  A place where consumers and producers meet to exchange goods and services and thus determine the price of a good or service.
• What is a competitive market?

  A market containing a large number of sellers and buyers with low barriers to entry.
• How are prices in a market typically determined?

  Through conventions of supply and demand.
• What is Equilibrium?

  A situation in which the market price has reached the level at which quantity supplied equals quantity demanded
• What is equilibrium price?

  The price that balances quantity supplied and quantity demanded.
• What is Equilibrium Quantity?

  The quantity supplied and the quantity demanded at the equilibrium price.
• What does equilibrium look like on a graph?

  
• What is excess supply (surplus)?

  Any above-equilibrium price where the quantity supplied exceeds the quantity demanded.

  
• What is excess demand (shortage)?

  When quantity demanded is more than quantity supplied

  
• Is a shortage or surplus long term?

  No, the conventions of supply and demand eventually even out the disequilibrium.