Principles of Microeconomics
🛒principles of microeconomics review
3.5 Demand, Supply, and Efficiency
Last Updated on June 24, 2024
Market equilibrium is where supply meets demand, maximizing social surplus. This sweet spot balances consumer and producer interests, leading to efficient resource allocation. It's the economic Goldilocks zone.
Price controls like ceilings and floors mess with this balance. They create shortages or surpluses, reducing overall economic efficiency. The resulting deadweight loss represents value that vanishes into thin air, benefiting no one.
Market Equilibrium and Efficiency
Surplus interaction in market equilibrium
Top images from around the web for Surplus interaction in market equilibrium
3.6 Equilibrium and Market Surplus – Principles of Microeconomics View original
Is this image relevant?
Consumer Choice – Introduction to Microeconomics View original
Is this image relevant?
Consumer Choice – Introduction to Microeconomics View original
Is this image relevant?
Consumer & Producer Surplus | Macroeconomics View original
Is this image relevant?
3.6 Equilibrium and Market Surplus – Principles of Microeconomics View original
Is this image relevant?
Consumer Choice – Introduction to Microeconomics View original
Is this image relevant?
1 of 4
Top images from around the web for Surplus interaction in market equilibrium
3.6 Equilibrium and Market Surplus – Principles of Microeconomics View original
Is this image relevant?
Consumer Choice – Introduction to Microeconomics View original
Is this image relevant?
Consumer Choice – Introduction to Microeconomics View original
Is this image relevant?
Consumer & Producer Surplus | Macroeconomics View original
Is this image relevant?
3.6 Equilibrium and Market Surplus – Principles of Microeconomics View original
Is this image relevant?
Consumer Choice – Introduction to Microeconomics View original
Is this image relevant?
1 of 4
- Consumer surplus
- Difference between maximum price consumer willing to pay and actual price paid
- Area below demand curve and above equilibrium price (shaded triangle on demand curve graph)
- Producer surplus
- Difference between minimum price producer willing to accept and actual price received
- Area above supply curve and below equilibrium price (shaded triangle on supply curve graph)
- Social surplus
- Sum of consumer surplus and producer surplus
- Maximized at market equilibrium where demand and supply curves intersect (total shaded area on market equilibrium graph)
- Market equilibrium
- Point where quantity demanded equals quantity supplied (intersection of demand and supply curves)
- Maximizes social surplus leading to allocative efficiency (optimal distribution of resources)
- Reflects the interaction of market forces (supply and demand)
Economic impacts of price controls
- Price ceilings
- Legally mandated maximum price set below market equilibrium price (rent control)
- Causes shortage as quantity demanded exceeds quantity supplied (housing shortages in cities with rent control)
- Reduces producer surplus and may reduce consumer surplus
- Creates deadweight loss reducing social surplus and market efficiency (shaded triangle on price ceiling graph)
- Price floors
- Legally mandated minimum price set above market equilibrium price (minimum wage)
- Causes surplus as quantity supplied exceeds quantity demanded (unemployment among low-skilled workers)
- Reduces consumer surplus and may reduce producer surplus
- Creates deadweight loss reducing social surplus and market efficiency (shaded triangle on price floor graph)
- Deadweight loss
- Reduction in social surplus caused by market inefficiencies
- Occurs when market equilibrium distorted by price controls or other factors (taxes, subsidies)
- Net loss to society as loss in surplus not transferred to any party (shaded triangle on deadweight loss graph)
- Represents a decrease in economic efficiency
Demand and supply in equilibrium
- Demand
- Relationship between price of good and quantity consumers willing and able to purchase
- Downward-sloping curve showing inverse relationship between price and quantity demanded (demand curve graph)
- Supply
- Relationship between price of good and quantity producers willing and able to sell
- Upward-sloping curve showing direct relationship between price and quantity supplied (supply curve graph)
- Market equilibrium
- Achieved when quantity demanded equals quantity supplied
- Occurs at intersection of demand and supply curves (market equilibrium graph)
- Equilibrium price is price at which quantity demanded equals quantity supplied ( on graph)
- Equilibrium quantity is quantity bought and sold at equilibrium price ( on graph)
- Shifts in demand and supply
- Changes in factors other than price cause demand or supply curve to shift (income, preferences, input prices)
- Shifts in demand or supply curves lead to new market equilibrium price and quantity (shift in demand or supply graph)
- Elasticity measures the responsiveness of quantity demanded or supplied to changes in price or other factors
Scarcity and Economic Decision-Making
- Scarcity: The fundamental economic problem of limited resources and unlimited wants
- Opportunity cost: The value of the next best alternative foregone when making a choice
- Marginal analysis: Evaluating the costs and benefits of small changes in economic decisions
Key Terms to Review (17)
Scarcity: Scarcity is the fundamental economic problem that arises from the fact that the resources available to meet human wants are limited. It is the core concept that drives economic decision-making and the study of economics as a whole.
Equilibrium Price: Equilibrium price is the market price at which the quantity demanded and the quantity supplied are equal, resulting in a balance between buyers and sellers in a given market. This concept is central to understanding how markets function and how prices are determined.
Elasticity: Elasticity is a measure of how responsive a dependent variable is to changes in an independent variable. It is a fundamental concept in microeconomics that describes the sensitivity of one economic variable, such as quantity demanded or supplied, to changes in another variable, such as price or income.
Marginal Analysis: Marginal analysis is a decision-making tool used in economics to evaluate the additional benefits and costs associated with producing or consuming one more unit of a good or service. It involves examining the change in total cost or total revenue resulting from a small change in output or consumption.
Allocative Efficiency: Allocative efficiency refers to the optimal distribution of resources and production of goods and services in an economy to best meet the needs and preferences of consumers. It is achieved when the mix of goods and services produced aligns with what consumers most value, as reflected in their willingness to pay.
Market Equilibrium: Market equilibrium refers to the point at which the quantity supplied and the quantity demanded in a market are equal, resulting in a stable market price and no tendency for change. This concept is fundamental to understanding the dynamics of supply and demand, as well as the efficient allocation of resources within a market system.
Economic Efficiency: Economic efficiency refers to the optimal use of resources to maximize the production and distribution of goods and services. It involves achieving the highest possible output from a given set of inputs or minimizing the inputs required to produce a desired level of output.
Producer Surplus: Producer surplus is the difference between the amount a producer is willing to sell a good for and the amount they actually receive for it in the market. It represents the economic benefit that producers gain from selling their goods at a price that is higher than the minimum price they would be willing to accept.
Price Floors: A price floor is a government-imposed minimum price for a good or service that must be charged in the market. It sets a lower limit on the price, preventing the market price from falling below the established floor. Price floors are often implemented to protect producers and ensure a minimum level of income or profitability for specific industries or markets.
Demand Curve: The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity demanded of that good or service. It depicts how the quantity demanded changes as the price changes, ceteris paribus (all other factors remaining constant).
Deadweight Loss: Deadweight loss refers to the economic inefficiency that occurs when the socially optimal quantity of a good or service is not produced or consumed due to market failures, such as government intervention or the presence of monopolies. It represents the loss in total surplus (the sum of consumer and producer surplus) that results from a deviation from the optimal market equilibrium.
Supply Curve: The supply curve is a graphical representation of the relationship between the price of a good or service and the quantity supplied of that good or service. It depicts the willingness and ability of producers to offer their products for sale at different price levels in a given market.
Price Ceilings: A price ceiling is a legal maximum price set by the government on a good or service. It is intended to make the good or service more affordable and accessible to consumers, but can lead to unintended consequences in the market.
Market Forces: Market forces refer to the supply and demand factors that determine the price and quantity of a good or service in a free market economy. These forces drive the equilibrium price and quantity in the market, and influence the allocation of resources within the economy.
Equilibrium Quantity: Equilibrium quantity refers to the quantity of a good or service that is demanded and supplied at the point where the market demand curve and market supply curve intersect, resulting in a balance between the quantity demanded and the quantity supplied. This concept is central to understanding the dynamics of markets for goods and services.
Consumer Surplus: Consumer surplus is the difference between the maximum price a consumer is willing to pay for a good or service and the actual price they pay. It represents the additional benefit or satisfaction consumers receive beyond what they have to pay, essentially the economic gain from a transaction from the consumer's perspective.
Social Surplus: Social surplus, also known as total surplus, is the sum of consumer surplus and producer surplus in a market. It represents the total economic benefit derived by both consumers and producers from a given market transaction, and is a measure of the overall efficiency and welfare generated in that market.