the price that matches the quantity supplied and quantity demanded
equilibrium price
equilibrium price is also referred to as
market-clearing price
quantity of the good or service bought and sold at equilibrium price is the
equilibrium quantity
when the quantity supplied exceeds the quantity demanded, there is a
surplus
excess supply is known as
surplus
markets move toward
equilibrium
A competitive market is in equilibrium when price has moved to a level at which
the quantity demanded equals the quantity supplied
How does equilibrium price "clear the market"?
ensures that every buyer willing to pay that price finds a seller willing to sell at that price/ vice versa
Why do all sales and purchases in a market take place at the same price?
if both buyers and sellers have been around for some time, buyers will refuse to pay more for the same product that they could buy cheaply, sellers will refuse to sell the same product for less money
The price of a good falls whenever there is a
surplus
Why does the market fall if it is above equilibrium price?
quantity supplied is more than quantity demanded, leads to surplus, means that at current price consumers will not buy goods, forcing suppliers to cut prices until it reaches equilibrium price
Why does the market rise if it is below the equilibrium price?
quantity demanded is more than quantity supplied, leads to shortage, buyers will either offer more money or sellers will realize they can charge higher prices
An increase in demand leads to
a rise in both equilibrium price and equilibrium quantity
A decrease in demand leads to
a fall in both equilibrium price and equilibrium quantity
When supply of a good or service decreases, the ________________ rises and the ____________ falls
equilibrium price, equilibrium quantity
When supply of a good or service increases, the _____________ falls and the __________ rises
equilibrium price, equilibrium quantity
When demand increases and supply decreases, the equilibrium price ________ and the equilibrium quantity _________
rises, is nondeterminant
When demand decreases and supply increases, the equilibrium price ______ and the equilibrium quantity ______
falls; is nondeterminant
When supply and demand go in opposite directions, we cannot tell what the ultimate effect on the _______ will be
quantity
When both demand and supply increase, the equilibrium price ______ and the equilibrium quantity ______
is nondeterminant, rises
When both demand and supply decrease, the equilibrium price ______ and the equilibrium quantity ______
is nondeterminant, falls
equilibrium creates a single ______ and _______ for a good/service
price, quantity
if the price occurs at some point where supply and demand are equal, then ________ exists
disequilibrium
if price is higher than equilibrium price, then
surplus
if price is lower than equilibrium price, then
shortage
if a price ceiling is effective, a _____ exists
shortage
How can disequilibrium be maintained?
***
Changes in the equilibrium price and quantity result from?
shifts of supply curve, demand curve, or both
An increase in demand increases
equilibrium price and equilibrium quantity
A decrease in demand decreases
equilibrium price and equilibrium quantity
An increase in supply moved _________ down and increases ____________
equilibrium price, equilibrium quantity
A decrease in supply decreases ________ and moves ______ down
equilibrium quantity, equilibrium price
When supply and demand shift in the same direction, what can you predict? What can you not predict?
quantity; price
When supply and demand shift in opposite directions, what can you predict? What can you not predict?
price; quantity
When a market is competitive, is the analysis that individuals base decisions more or less complicated?
less complicated
If a market is not competitive, a firm must also worry about
whether increasing supply will drive down market price, reducing profit
legal restrictions on how high or low a market price may go
Price controls
maximum price sellers are allowed to charge for a good or service
price ceiling
minimum price buyers are required to pay for a good or service
price floor
What happens if the government sets a price ceiling above equilibrium price?
price ceiling isn't binding, has no effect
What are the ways in which a price ceiling causes inefficiency?
inefficiently low quantity, inefficient allocation to consumers, wasted resources, inefficiently low quality
because a price ceiling reduced price of a good, it reduces quantity that sellers are willing to supply, preventing mutually beneficial transactions from occurring
inefficiently low quantity
some people who want the good badly and are willing to pay a high price don't get it, and some who care relatively little about the good and are only willing to pay a low price do get it
inefficient allocation to consumers
people expend money, effort, and time to cope with the shortages caused by the price ceiling
wasted resources
a market in which goods or services are bought and sold illegally- either because it is illegal to sell them at all or because the prices charged are legally prohibited by a price ceiling
Black market
three common results of a price ceiling
persistent shortage of good, Inefficiency arising from persistent shortage, emergence of black market activity
A legal floor on the wage rate, which is the market price of labor
Minimum wage