Equilibrium and Price Mechanism Flashcards Preview

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Flashcards in Equilibrium and Price Mechanism Deck (21)
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1
Q

What is an equilibrium

A

Where the demand and supply graphs meet:

2
Q

What does excess supply look like?

A
3
Q

What does excess demand look like?

A
4
Q

What is the 1st function of the price mechanism

A
  1. Signalling (How producers get the message)
  2. Incentives
  3. Rationing
  4. Allocate
5
Q

What is a consumer surplus?

A

The difference between what consumers are willing to and the actual price for a product.

6
Q

Where on the graph is the consumer surplus measured?

A

The area below the demand curve and above the price line

7
Q

What is a producer surplus?

A

The difference between the revenue (current price) received by a producer and the cost necessary to produce the good

8
Q

Where on the graph is the producer surplus?

A

The area below the price line and above the supply line

9
Q

What is the 2nd function of the price mechanism?

A
  1. Signalling
  2. Incentives (How are producers incentivised to change the price)
  3. Rationing
  4. Allocate
10
Q

What is the 3rd function of the price mechanism?

A
  1. Signalling
  2. Incentives
  3. Rationing (what happens to the excess demand/supply -> extensions and contractions)
  4. Allocate
11
Q

What is the 4th function of the price mechanism?

A
  1. Signalling
  2. Incentives
  3. Rationing
  4. Allocate (perfect allocation where d = s)
12
Q

What is the Net Welfare benefit?

A

The combined values of the consumer and producer surpluses.

13
Q

What does the Net Welfare Benefit look like on a graph?

A
14
Q

What is the deadweight loss?

A

The measure of economic inefficiency when the market is in disequilibrium. (Can also be caused by price floors and ceilings.)

15
Q

When is a price ceiling (maximum) effective?

A

A price ceiling is only effective when set below equilibruim price.

16
Q

What happens during an effective price ceiling?

A
  • Decrease in Qs
  • Increase in Qd
  • There is excess demand and a shortage
17
Q

After an effective price ceiling where on the graph is the deadweight loss?

A
18
Q

When is a minimum pricer effective.

A

Only when set above the equilibrium price.

19
Q

What happens during an effective price floor (minimum)?

A
  • Qd decreases
  • Qs would want to increase but can’t because of the limited demand
20
Q
A
21
Q

Where is the dead weight loss and the surpluses during a price floor?

A