2.3 Competitive market equilibrium

Market equilibrium is the price and quantity at which quantity demanded equals quantity supplied. No surplus or shortage pushes the market away from that point.

At a price above equilibrium, surplus pressures sellers to reduce price; below it, shortage pressures buyers to bid price up.

Locate the intersection, compare actual price with equilibrium and identify surplus or shortage.

Demand and supply meet at $6 and 100 units; at$8, firms offer more than buyers want, creating surplus.

Equilibrium is a tendency under stated conditions, not proof that every buyer is satisfied.

A change in a demand or supply determinant shifts a curve and creates a new equilibrium price and quantity.

The direction depends on which curve shifts and whether the movement changes price, quantity or both.

Name the shift, predict the new intersection and explain the adjustment path.

A heatwave shifts demand for cold drinks right, raising equilibrium price and quantity if supply slopes upward.

Do not shift a curve for a change in the good’s own price.

The price mechanism uses price signals, incentives and rationing to coordinate scarce resources in markets.

Prices communicate relative scarcity, reward suppliers and ration demand, but may exclude people with low income or ignore external costs.

Trace how a change in demand or supply changes price and the resulting behaviour.

A shortage of rental homes raises rents, encouraging construction but making access harder for some households.

The price mechanism coordinates allocation, not necessarily fairness or social welfare.

Consumer surplus is willingness to pay minus price; producer surplus is price minus willingness to accept. They measure gains from voluntary exchange.

Surplus changes when price, quantity or curve position changes, and distribution matters even when total surplus rises.

Mark the relevant area between price and demand or supply, then state who gains or loses.

If a buyer would pay $10 but pays$7, consumer surplus is $3 for that unit.

Surplus is not cash profit or a complete measure of wellbeing.

Allocative efficiency occurs when resources produce the combination most valued by society, represented in a competitive model by price equal to marginal cost.

At the efficient quantity, total surplus is maximised under the model assumptions. Market power, externalities and missing markets can cause failure.

Compare marginal benefit and marginal cost, then identify the source of any welfare loss.

If the marginal benefit of the last unit is $5 and marginal cost$5, producing one more would not increase net benefit.

A competitive equilibrium is not automatically socially efficient when external costs exist.

Surplus can be calculated as geometric areas: triangle area is one-half × base × height, using the relevant price and quantity differences.

The diagram must identify intercepts, equilibrium and the actual price; a policy can transfer surplus or create deadweight loss.

Label axes and vertices, calculate each area, then compare total and distributional change.

A consumer-surplus triangle with base 100 units and height $4 has area$200.

Do not use a rectangle when the demand or supply boundary is sloped.