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definition of market equilibrium and disequilibrium
- Market Equilibrium: a state in which the supply and demand for a good or service are equal, resulting in a stable price.
- In a market that is in equilibrium, the quantity supplied of a good or service is equal to the quantity demanded, and there is no surplus or shortage.
- This means that at the market equilibrium price, consumers are willing to purchase all of the goods or services that producers are willing to supply.
- Market Disequilibrium: when the supply and demand for a good or service are not equal, resulting in a surplus or shortage.
- In this state, the quantity supplied does not equal the quantity demanded, and there is either a surplus of goods or a shortage of goods.
- This can result in changes in the price of the good or service, as buyers and sellers adjust their behavior to reach a new equilibrium.
effects of shifts in demand and supply curves on equilibrium price and quantity
- Shifts in demand curve
- If the demand curve shifts to the right, it means an increase in demand and an upward pressure on prices, leading to an increase in both the equilibrium price and quantity.
- If the demand curve shifts to the left, it means a decrease in demand and a downward pressure on prices, leading to a decrease in both the equilibrium price and quantity.
- Shifts in supply curve
- If the supply curve shifts to the right, it means an increase in supply and a downward pressure on prices, leading to a decrease in the equilibrium price and an increase in the equilibrium quantity.
- If the supply curve shifts to the left, it means a decrease in supply and an upward pressure on prices, leading to an increase in the equilibrium price and a decrease in the equilibrium quantity.
relationships between different markets: joint demand (complements), alternative demand (substitutes), derived demand, joint supply
- Joint Demand (Complements): the situation where the demand for one good is directly linked to the demand for another good.
- The two goods are referred to as complementary goods, meaning they are used together.
- For example, the demand for hot dogs and the demand for buns are joint demands as one cannot consume a hot dog without a bun. An increase in the price of buns will lead to a decrease in the demand for hot dogs and vice versa.
- Alternative Demand (Substitutes): the situation where the demand for one good is directly linked to the availability of a substitute good.
- The two goods are referred to as substitute goods, meaning they can be used in place of each other.
- For example, the demand for Pepsi and the demand for Coca-Cola are alternative demands as they are substitutes for each other. An increase in the price of Pepsi will lead to an increase in the demand for Coca-Cola and vice versa.
- Derived Demand: the demand for a good that is a result of the demand for another good.
- For example, the demand for steel is a derived demand because it is required to produce cars, buildings, and other products. The demand for steel is dependent on the demand for these final goods.
- Joint Supply: the situation where the supply of one good is directly linked to the supply of another good.
- The two goods are referred to as joint products, meaning they are produced together.
- For example, the supply of beef and the supply of leather are joint supplies as one cannot produce beef without producing leather, which is a byproduct of the beef industry. An increase in the demand for beef will lead to an increase in the supply of leather and vice versa.
functions of price in resource allocation; rationing, signalling (transmission of preferences) and incentivising
- Rationing: Price serves as a rationing mechanism in the allocation of resources.
- If the demand for a good exceeds its supply, the price will rise, making it more expensive for some consumers to purchase. This serves as a signal for consumers to adjust their behavior and reduce their demand for the good. By doing so, the available supply of the good is rationed to those who value it most.
- Signaling: Price also serves as a signal that transmits information about consumer preferences.
- Higher prices indicate that a good is in high demand and in short supply, while lower prices indicate that a good is in lower demand and abundant. This information is important for producers, as it helps them to adjust their production decisions to match consumer preferences.
- Incentivizing: Price serves as an incentivizing mechanism that motivates individuals and firms to allocate resources efficiently.
- Higher prices for goods in high demand provide an incentive for producers to increase supply, while lower prices for goods in low demand provide an incentive for producers to shift production to other goods.
- The ability of prices to respond to changes in demand and supply is crucial in ensuring that resources are allocated to their most valued uses.
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