Surplus and Shortage – Flashcards
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What is a Market?
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An arrangement in which buyers and sellers interact to determine the price and quantity of goods and services exchanged
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What is Surplus?
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A market condition existing at any price where the quantity supplied is greater than the quantity demanded
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What is Shortage?
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A market condition existing at any price where the quantity supplied is less than the quantity demanded
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Most goods are what?
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Scarce-desirable but limited
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A shortage occurs when?
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the quantity demanded is greater than the quantity supplied at current price
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How do we eliminate shortages?
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By increasing the price but not eliminating scarcity
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Assuming that, seller are free to sell their products at any price when?
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All possible Price-Quantity combinations are unstable except at equilibrium
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A competitive market is in equilibrium when?
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Price has moved to a level at which quantity of a good or service demanded equals the quantity of that good or service supplied
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What is an Equilibrium Point?
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the point in a market at which supply and demand intersect and where the quantity demanded is equal to the quantity supplied
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What is Equilibrium Price?
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Is the price at the intersection of the market supply and demand curves; at this price, quantity demanded equals the quantity supplied
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What is Equilibrium Quantity?
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quantity at the intersection of the market supply and demand curves; during this the quantity demanded equals the quantity supplied
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What is a Price System?
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a mechanism that uses the forces of supply and demand to create an equilibrium through rising and falling prices
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Why is the Price System important?
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Because it is mechanism for distributing scarce goods and services
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When all other non-price factors are held constant, which coordinate is the only stable one on the graph?
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The equilibrium point
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Forces of surplus and shortage guarantee that?
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All other prices are temporary
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An increase in Demand or a decrease in Supply will?
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Not cause a shortage and it will lead to a new equilibrium with a higher price
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A decrease in Demand or an increase in supply will?
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Not cause a surplus and it will lead to a new equilibrium with a lower price
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A shift of one curve causes what?
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A movement along the other curve to a new equilibrium point
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Why would we prefer a world with all markets in equilibrium?
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If all markets are in equilibrium there will be no shortages or surpluses for any good or service and the result is market efficiency
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What is "in balance" at Equilibrium?
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forces of supply and demand because there is no reason for price or quantity to change
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When Quantity supplied exceeds Quantity demanded what happens?
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Theres Surplus and price decreases to the equilibrium price
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When Quantity demanded equals Quantity supplied what happens?
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Theres neither Surplus nor shortage and equilibrium price is established
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When Quantity demanded exceeds Quantity supplied what happens?
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There's Shortage and price increases to equilibrium price
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A surplus on a market should not be confused with what?
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consumer or producer surplus
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To understand the concept of market efficiency economists use what?
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The area between the market price and the demand and supply curves to measure gains and losses from the market transaction for consumers and producers
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What is Consumer Surplus?
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The difference between the maximum price consumers are willing to pay for a product and the market price of the product
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What is consumer surplus measured in?
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Dollar terms
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What does consumer surplus reflect?
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The consumer's gain from exchange by paying a lower price than what is required to obtain the good
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If a consumer is willing to pay $1000 and the market price for a SuperBowl ticket is $480, what is the consumer surplus?
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$520 $520=$1000-$480
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If Tom is willing to pay for an ice cream cone that is $5.00 and the market equilibrium price is $2.00, what is Tom's consumer surplus?
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$3.00 $3.00=$5.00-$2.00
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What is Total consumer surplus measured by?
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By calculating the deference between the maximum willingness to pay and the actual price for each consumer, and then total those differences
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Total consumer surplus is located where on a graph?
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The area beneath the demand curve and above the equilibrium
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How to calculate Total consumer surplus?
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Height x Base divided by 2
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What is Producer Surplus?
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The difference between the market price and the minimum price at which a producer is willing and able to sell a particular quantity
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What is Individual producer surplus?
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the difference between the market price and the minimum price at which a producer would be willing to sell a product
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You are willing to sell a car for $10,000 and your market price is $15,000, what is your producer surplus?
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$5,000
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Where is Total producer surplus on a graph?
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The area above the supply curve and below the equilibrium price
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When are competitive markets efficient?
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When they maximize the sum of consumer and producer surplus
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What is deadweight loss?
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Is the net loss of consumer and producer surplus from underproduction or overproduction of a product
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Suppose Anna is willing to sell one skirt for $5.00, a second skirt for $10.00, a third skirt for $16.00, a forth skirt for $25.00 and the market price is $20.00. Is Anna's producer surplus $15, $20, $22 or $29
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$29 20-5=15 20-10=10 20-16=4 15+10+4=$29
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If Sam is willing to pay $50 for one good X, $30 for a second, $20 for a third, $8 for a fourth and the market price is $10. Is Sam's consumer surplus $10, $40, $70 or $100
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$70
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What do taxes do?
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Taxes lead to lower quantities produced, higher prices for buyers and lower effective prices for sellers
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What do Subsidies do?
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increase the quantity produced, lower prices for buyers and increase seller prices
