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Economic equilibriumEconomic equilibrium is a state where economic forces such as supply and demand are balanced and in the absence of external influences the (equilibrium) values of economic variables will not change. |
Price is above market equilibriumSurplus. Higher supply than demand. | Equilibrium price falls | Equilibrium qty rises | Happens if new tech released or new firm enters market |
Price below market equilibriumShortage. Higher demand than supply. | Equilibrium Price rises | Equilibrium qty falls | Demand curve shifts to the right | Maybe because incomes have increased or population has grown. |
Effect of an increase in supply / surplus
| | Key equilibrium termsCompetitive equilibrium | In a competitive equilibrium, supply equals demand. | Ceteris Paribius 'all else being equal' | Requires that when analysing the relationship between two variables all else must be held constant. | Market equilibrium | A condition where a market price is established through competition such that the amount of goods or services sought by buyers is equal to the amount of goods or services offered by sellers. | Competitive market equilibrium | A market equilibrium with many buyers and many sellers | Surplus | Qty supplied > qty demanded. Price is above equilibrium. | Shortage | Qty supplied < qty demanded. Price is below equilibrium |
Effect of an increase in demand / shortage
| | Properties of equilibriumThree basic properties of equilibrium in general proposed by Huw Dixon: | P1 | The behavior of agents is consistent. | P2 | No agent has an incentive to change its behavior | P3 | Equilibrium is the outcome of some dynamic process (stability). |
Complementary goodsComplementary goods: price change of one effects quantity demanded of the other. | Price increasing on complimentary | See surplus | Price decreasing on complimentary | See shortage |
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