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Chapter 3: Problem 1

What do economists mean by market equilibrium?

Short Answer

Expert verified
Economists refer to market equilibrium as the state in a market where the quantity of goods supplied by sellers equals the quantity of goods demanded by buyers. At this equilibrium, there are no surpluses or shortages of goods, and the price at which this balance is achieved is known as the equilibrium or market-clearing price.

Step by step solution

01

Define Market

A Market is a platform where buyers and sellers meet to conduct transactions. These transactions could involve goods, services, or resources.
02

Understand Economic Equilibrium

Economic Equilibrium is a state of balance where economic forces such as supply and demand are in a state of equilibrium, and there are no external forces that can disrupt this balance.
03

Elucidate Market Equilibrium

Market equilibrium, a specific type of economic equilibrium, refers to a condition or state in a market where the quantity of goods supplied is equal to the quantity of goods demanded. Due to the balance of these forces, there is no shortage or surplus of goods in the market. The price at which the equality of supply and demand is achieved is known as the equilibrium price, or market-clearing price.

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Most popular questions from this chapter

What is the difference between a change in demand and a change in quantity demanded?

In early 2017, an article in the Financial Times about the oil market quoted the chief economist of oil company \(\mathrm{BP}\) as saying, "Pricing pressure is likely to come from the supply side, because of strong growth in US shale oil (crude oil found within shale formations), and the demand side as the rise of renewable energy, including electric vehicles, gradually slows growth in oil consumption." After reading this article, a student argues: "From this information, we would expect that the price of oil will fall, but we don't know whether the equilibrium quantity of oil will increase or decrease." Is the student's analysis correct? Illustrate your answer with a demand and supply graph.

[Related to Solved Problem 3.3 on page 88\(]\) In The Wealth of Nations, Adam Smith discussed what has come to be known as the "diamond and water paradox": Nothing is more useful than water: but it will purchase scarce anything; scarce anything can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it. Graph the market for diamonds and the market for water. Show how it is possible for the price of water to be much lower than the price of diamonds, even though the demand for water is much greater than the demand for diamonds.

Proposals have been made to increase government regulation of firms providing childcare services by, for instance, setting education requirements for childcare workers. Suppose that these regulations increase the quality of childcare and cause the demand for childcare services to increase. At the same time, assume that complying with the new government regulations increases the costs of firms providing childcare services. Draw a demand and supply graph to illustrate the effects of these changes in the market for childcare services. Briefly explain whether the total quantity of childcare services purchased will increase or decrease as a result of the regulations.

Briefly explain whether each of the following statements describes a change in supply or a change in quantity supplied. a. To take advantage of high prices for snow shovels during a snowy winter, Alexander Shovels, Inc., decides to increase output. b. The success of Pepsi's LIFEWTR and Coke's smartwater leads more firms to begin producing premium bottled water. c. In the six months following the Japanese earthquake and tsunami in 2011 , production of automobiles in Japan declined by 20 percent.
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