3.5

• what is market equilibrium ?

  Occurs when planned demand equals planned supply at a particular price - there is no excess demand or excess supply
• what is the equilibrium price?

  the price at which the quantity demanded by consumers equals the quantity supplied by producers
• market disequilibrium definition

  exists at any price other than the equilibrium price, when either planned demand < planned supply or planned demand > planned supply
• what happens if the market price is above equilibrium ?

  theres is excess supply (a surplus) - producers want to sell more that consumers are willing to buy - downward pressure on price
• what happens if the market price is below equilibrium?

  excess demand (shortage) - consumers want to buy more than firms are suppling - upward pressure on price
• excess supply definition

  firms wish to sell more than consumers wish to buy
• excess demand definition 


  consumers wish to buy more than firms wish to sell
• what causes a shift in the equilibrium price?

  any shift in demand or supply will change the equilibrium price and quantity
• what happens to equilibrium if demand increases?

  the demand curve shifts right - price and quantity increase
• what happens to equilibrium if demand decreases?

  demand curve shifts left - price and quantity fall
• what happens to equilibrium if supply increases?

  supply curve shifts right - price falls, quantity rises
• what happens to equilibrium if supply decreases?

  supply curve shifts left - price rises, quantity falls
• what happens if both demand and supply increase?

  • quantity definitely rises
  • price change depends on which shift is greater
• what happens if both demand and supply decrease?

  • quantity definitely falls
  • price change depends on which shift is stronger
• how des consumer and producer surplus relate to equilibrum ?

  at equilibrium, consumer surplus (willingness to pay > price) and producer surplus (price > minimum acceptable) are maximised
• why is understanding equilibrium important in economics?

  • helps predict market outcomes
  • explains how prices adjust naturally
  • informs government intervention decisions
  • helps firms set optimal pricing strategies