Market Equilibrium

Question 1

What causes a market surplus?

Answer 1

A market surplus is create when actual price (AP) of a commodity is more than the equilibrium price; therefore, quantity supplied is more than quantity demanded (e.g., minimum wage).

Question 2

Define “market equilibrium price”.

Answer 2

1. Price at which the quantity of a commodity supplied is equal to the quantity of that commodity demanded
2. The intersection of the market demand and supply curves.

Question 3

How can government directly influence market equilibrium?

Answer 3

1. Taxation increases the cost and shifts the market supply curve up and to the left; tax decreases have the opposite effects
2. Subsidization decreases the cost and shifts the market supply curve down and to the right; decreases in subsidization have the opposite effects
3. Rationing reduces demand, thus shifting the demand curve downward and to the left, thus lowering the equilibrium quantity and price.

Question 4

Describe the results of a change in market demand (only) on equilibrium.

Answer 4

1. Increases in market demand = Demand curve shifts up and to the right; Decrease in market demand = Demand curve shifts down and to the left
2. Increase in market demand w/no change in supply = Increase in both equilibrium price and equilibrium quantity
3. Decrease in market demand w/no change in supply = Decrease in both equilibrium price and equilibrium quantity

Question 5

What causes a market shortage?

Answer 5

A market shortage is created when actual price (AP) of a commodity is less than the equilibrium price; therefore, quantity supplied is less than quantity demanded at AP (e.g., rent controls)

Question 6

Describe the results of a change in market supply (only) on equilibrium.

Answer 6

1. Increases in market supply = Supply curve shifts down and to the left; Decrease in market supply = Supply curve shifts up and to the left
2. Increase in market supply w/no change in demand = Decrease in equilibrium price and increase in equilibrium quantity
3. Decrease in market supply w/no change in demand = Increase in equilibrium price and a decrease in equilibrium quantity