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Unit 2 Microeconomics(Equilibrium) - Coggle Diagram
Unit 2 Microeconomics(Equilibrium)
Definition
The market equilibrium occurs at the point where the supply curve of a good or service crosses the demand curve.
The equilibrium price, also called the market-clearing price, is the price at which the quantity demanded of a good is equal to the quantity supplied
Equilibrium is a state of balance, where two opposing forces are equally matched.
Disequilibrium
As markets move with Supply and Demand shifting, the market typically finds itself in disequilibrium where Qd does not equal Qs.
These issues are theoretically seen as temporary, and the market should adjust to equilibrium.
Excess Supply (Surplus)
Quantity Supplied > Quantity Demanded
Excess Demand (Shortage)
Quantity Demanded > Quantity Supply
Price Mechanisms
Changes in price, or the price mechanism determine how scarce resources are allocated in an economy.
As price changes, the free market corrects itself using a system of negative feedback consisting of signals and incentives.
Signalling function of pricesWARNING
Introduces negative feedback into the market system by communicating WHAT consumers and producers should do. The feedback causes stakeholders to respond in a way that brings the market back into equilibrium, stabilising the system.
The incentive function of pricesBEHAVIOUR CHANGE
Introduces negative feedback into the market system by providing financial MOTIVATION to consumers and producers to react in a way that brings the market back into equilibrium, stabilising the system.
Rationing
Price is typically the best rationing function
However, during times of severe scarcity where individuals are WILLING but NOT ABLE to purchase bare necessities due to dramatic shortages, the government may step in. In World War II for example, government rationing of many goods in the UK.
Rationing refers to the controlled distribution of resources. Rationing is necessary at any time when goods and resources are scarce.