Unit 1: Market equilibrium

• What is a market?

  any place that brings buyers and sellers together to exchange goods for money
• What is a free market?

  Market in which buyers and sellers determine the prices and quanity of goods sold
• What is market equilibrium?

  A state in which the quantity demanded is the same as quantity supplied
• How is market equilibrium shown graphically?

  Through an intersection of the demand and supply curves
• Why does excess demand occur?

  When prices are too low or demand is too high and supply can't keep up
• Why does excess supply occur?

  When the prices are too high or demand is too low
• How do both consumers and producers react to excess demand?

  Producers are frustrated their product is selling quickly at a low price and consumers are frustrated they might not be able to get the purchase
• How is excess demand solved?

  Through an increase in price
• How is the solution to excess demand shown graphically?

  Contraction in Quantity demanded as buyers do not want to buy at a high price and extension in QS as sellers supply more at high prices
• How do both consumers and producers react to excess supply?


  Consumers are not willing to buy at a high price and Producers are mad products are not selling
• How is excess supply solved?

  Through a decrease in price
• How is the solution to excess supply shown graphically?

  Contraction in QS as sellers don't want to supply and Extension in QD as buyers want to buy
• ARSI- What are the price functions?


  Allocate scarce resources, Ration excess demand/supply, Signal prices are too high/low, and Incentives to change price
• What are the steps of ARSI?

  1-Signal prices are too high/low 2-Incentive to change price, 3-Rations excess demand/supply 4-Allocation of scarce resource
• Demand Increases


  Curve shifts to the right. Price increases. Quantity increases.
• Demand decreases


  Curve shifts to the left. Quantity decreases. Price decreases.
• Supply increases.


  Curve shifts to the right. Price decreases. Quantity increases.
• Supply decreases


  Curve shifts to the left. Price increases. Quantity decreases.