| What happens at Equilibrium? | -The Price and Output are Stable - a Balance in the Market between Supply and Demand has been Reached.
-This is known as a Market being Cleared. |
| In a Free Market, what Determines Equilibrium? | -Supply and Demand determines the Equilibrium Price [The Price Sellers wish to Sell and what Firms are putting the Price Tag] and thus the Equilibrium Quantity |
| How, using Market Forces, can Excess Supply be extinguished? | -Excess Supply is when Qs is Higher than Qd. This happens [Assuming Demand and Supply Curves are Normal] when the Price is Set Above the Equilibrium Price
-If the Price was Set above, then the Supplied would Outmatch the Demanded, so the Price would be Forced Downwards as the Supplier is Loosing Money. This leads to Equilibrium. |
| Why is Excess Supply bad in a Free Market? | -Waste of Resources
-Unemployment [When Production is Scaled back, Workers may be Fired]
-Little Incentive in Investing in Innovation as what’s the Point?
-Lower Prices |
| How, using Market Forces, can Excess Demand be extinguished? | -This is when Demand for the Good is Greater than the Supply. This happens when the Price is Below the Equilibrium Price.
-If so, then the Price would be Forced Upwards as to Match the Demand, Supply must Increase. Only way to Reasonably Achieve that is Increasing the Price [Incentive] leading to an Equilibrium Point being Reached. |
| Why is Excess Demand bad for a Free Market? | -High Prices leading to Inflation
-Limited Access and therefore Inequality in the Population [Healthcare..]
-Opportunity Cost and a Misallocation of Resources
-Black Markets Emerge leading to Unsafe Consumption and Exploitation [Drugs..] |
| What happens, in a Market of Demand and Supply, if Demand Shifts to the:
1. Right
2. Left | 1. Demand Increasing leads to More Price, but more being Supplied into the Markets making a New Equilibrium.
2. Demand Falling leads to a Fall in Price, and Less being Supplied into the Markets making a nEw Equilibrium. |
| What happens in a Market of Demand and Supply, if Supply shifts to the:
1. Right
2. Left | 1. Supply Increasing leads to a Fall in a Price but an Increase in the Demand
2. Supply Falling leads to an Increase in the Price and a Fall in the Demand. |
| How does Price Elasticity for both Demand and Supply affect the New Equilibrium Point [If a Shift Occurred] | -If the Elasticity of Supply or Demand was Inelastic [or Both] then the Shift in either of them would have Price be more Affected in terms of %
-If the Elasticity of Supply or Demand was Elastic, then Quantity would be more Affected in terms of % |
| What Assumptions does the Demand and Supply model Make? What does this lead to? | -Supply and Demand are Independent of Each other
-All Markets are Perfectly Competitive
-Ceteris Paribus.
- This leads to the Model having little Real World Usage but helps understand how Supply and Demand Behave in a way that’s Easy, Simple and Understandable |
