Market Equilibrium Basics
What is the point where quantity demanded equals quantity supplied called?
Market equilibrium
What does consumer surplus measure?
The difference between what consumers are willing to pay and what they actually pay.
What is allocative efficiency?
When total welfare (CS + PS) is maximised and no deadweight loss exists.
What does price elasticity of supply measure?
How responsive quantity supplied is to a change in price.
What effect does a subsidy have on supply?
It increases supply, shifting the supply curve rightward.
When there’s a shortage, what happens to price in a competitive market?
Price rises until equilibrium is restored (where QD = QS).
What happens to consumer surplus when price increases?
It decreases because consumers pay more and buy fewer units.
What happens to allocative efficiency when a deadweight loss exists?
Allocative efficiency is lost, as total welfare is not maximised.
How does an inelastic supply curve affect producers’ ability to respond to price changes?
They can’t change output easily, so supply responds very little to price changes.
Why might a government remove a subsidy?
To reduce costs and improve efficiency if the subsidy causes market distortion.
What happens to equilibrium price and quantity when supply decreases?
Price increases, quantity decreases.
How does producer surplus change when the price of a good rises?
Producer surplus increases, as producers receive a higher price per unit.
On a graph, what area represents deadweight loss after a quota or tax?
The triangular area between the demand and supply curves beyond the new equilibrium.
Why producer surplus increases more when supply is elastic than when it is inelastic?
In elastic supply, a small price rise leads to a large increase in output, increasing total surplus more.
How removing a subsidy affects government spending.
The government saves money that can be redirected to health, education, or welfare.
Explain why both consumer and producer surpluses are maximised at equilibrium.
Because resources are allocated efficiently, and no deadweight loss exists.
Explain why a decrease in price increases consumer surplus but decreases producer surplus.
A lower price benefits consumers (more affordable) but reduces producers’ earnings, lowering their surplus.
Explain why consumer and producer surplus are not maximised when a market is not in equilibrium.
Some CS and PS are lost and not gained by anyone, creating lost welfare (DWL).
Use the fishing industry example to describe momentary, short-term, and long-term supply elasticity.
Momentary: fixed boats → vertical supply. Short-term: some inputs fixed → slightly elastic. Long-term: all inputs variable → elastic supply.
Describe how a minimum price can benefit producers in an export market.
It raises domestic prices, increasing producer surplus, and producers can export the surplus abroad.
Use an economic model explain how removing a subsidy restores allocative efficiency.
Removing the subsidy shifts supply left, removing the deadweight loss, and restoring maximum total surplus.
Identify the effect on consumer surplus and producer surplus after a subsidy is removed.
Consumer surplus and producer surplus both decrease, but government costs fall.
Explain how removing a government subsidy can restore allocative efficiency and what effect it has on government
Removing the subsidy eliminates the deadweight loss, CS and PS are maximised , and government costs are saved.
How elastic and inelastic price elasticities of supply affect efficiency after a quota is introduced.
Elastic supply creates a larger change in producer surplus but bigger DWL, while inelastic supply causes smaller efficiency losses.
How does government intervention, such as subsidies or quotas, impacts allocative efficiency and welfare.
It can distort prices, create deadweight loss, and reduce total welfare, unless carefully targeted to correct market failure.