Market Equilibrium and Disequilibrium - AP Macroeconomics

1. What is deadweight loss in market terms?

   The loss of economic efficiency when equilibrium is not achieved. Results from market intervention preventing efficient allocation.

2. What is a price ceiling?

   A legal maximum price that can be charged for a good or service. Government-imposed upper limit on prices.

3. What is the effect of a government-imposed rent control below equilibrium?

   Creates a housing shortage. Price ceiling below equilibrium creates excess housing demand.

4. Define disequilibrium in a market.

   Disequilibrium occurs when quantity supplied does not equal quantity demanded. Markets are unstable when $Q_d \neq Q_s$.

5. What is the role of prices in a market system?

   Prices allocate resources and signal information to buyers and sellers. Price mechanism coordinates economic activity efficiently.

6. What is the impact of a subsidy on market equilibrium?

   A subsidy lowers the equilibrium price and increases quantity. Government payment to producers shifts supply rightward.

7. What results from increased consumer expectations of future prices?

   Increase in current demand, raising price and quantity. Anticipated price increases shift current demand rightward.

8. What effect does a decrease in the price of a complement have on demand?

   Increases demand for the original good, raising price and quantity. Cheaper complements increase demand for original good.

9. What is a price floor?

   A legal minimum price that must be paid for a good or service. Government-imposed lower limit on prices.

10. Define producer surplus at market equilibrium.

    The difference between the price producers receive and the minimum they would accept. Area above supply curve and below market price.

11. How does an increase in demand affect the market equilibrium?

    Increases both equilibrium price and quantity. Rightward demand shift raises both market variables.

12. How does an import quota affect market equilibrium?

    Reduces supply, increases price, and decreases quantity. Trade restriction artificially limits supply.

13. How does the imposition of tariffs affect market equilibrium?

    Raises prices and reduces quantity of imported goods. Import tax artificially reduces foreign competition.

14. What happens if both demand and supply increase simultaneously?

    Equilibrium quantity increases; price effect is indeterminate. Price depends on relative magnitudes of shifts.

15. How does an improvement in consumer preferences affect demand?

    Increases demand, leading to higher equilibrium price and quantity. Taste changes shift demand curve rightward.

16. What is the equilibrium quantity?

    It is the quantity exchanged at the equilibrium price. The amount traded when market clears.

17. What is market equilibrium?

    Market equilibrium is when quantity demanded equals quantity supplied. The market clearing point where there's no excess supply or demand.

18. State the law of supply and demand.

    Price adjusts to bring supply and demand into balance. Market forces automatically correct imbalances through price changes.

19. What is the effect of a government-imposed minimum wage above equilibrium?

    Creates a surplus of labor, resulting in unemployment. Price floor above equilibrium creates excess labor supply.

20. How does a decrease in production costs affect supply?

    Increases supply, lowering equilibrium price and increasing quantity. Reduced input costs shift supply curve rightward.

21. What is a shortage in terms of market equilibrium?

    A shortage is when quantity demanded exceeds quantity supplied. Occurs below equilibrium price level.

22. What happens if both demand and supply decrease simultaneously?

    Equilibrium quantity decreases; price effect is indeterminate. Price depends on relative magnitudes of shifts.

23. What is the impact of a tax on market equilibrium?

    A tax raises the equilibrium price and decreases quantity. Government levy on transactions shifts supply leftward.

24. Identify the effect of a price ceiling below equilibrium price.

    Creates a shortage as quantity demanded exceeds quantity supplied. Artificial price cap prevents market clearing.

25. What happens when there is excess supply in a market?

    Excess supply leads to a surplus, causing downward pressure on price. Producers compete by lowering prices to sell excess inventory.

26. Identify the effect of a price floor above equilibrium price.

    Creates a surplus as quantity supplied exceeds quantity demanded. Artificial price support prevents market clearing.

27. What occurs in a market with excess demand?

    Excess demand leads to a shortage, causing upward pressure on price. Consumers bid up prices when goods are scarce.

28. How does a technological advancement affect supply?

    Increases supply, lowering equilibrium price and increasing quantity. Lower production costs shift supply curve rightward.

29. What effect does a decrease in the price of a substitute have on demand?

    Decreases demand for the original good, lowering price and quantity. Cheaper substitutes reduce demand for original good.

30. What results from an increase in supply with demand constant?

    A decrease in equilibrium price and an increase in quantity. Rightward supply shift benefits consumers with lower prices.

31. What results from a decrease in demand with supply constant?

    A decrease in equilibrium price and quantity. Leftward demand shift reduces both market variables.

32. What is a surplus in terms of market equilibrium?

    A surplus is when quantity supplied exceeds quantity demanded. Occurs above equilibrium price level.

33. Define consumer surplus at market equilibrium.

    The difference between what consumers are willing to pay and what they actually pay. Area below demand curve and above market price.

34. What is the effect of an excise tax on producers?

    Shifts supply curve leftward, increasing price and lowering quantity. Per-unit tax reduces supply by increasing production costs.

35. What results from increased producer expectations of future prices?

    Decrease in current supply, raising price and lowering quantity. Anticipated price increases shift current supply leftward.

36. How does a decrease in supply affect the market equilibrium?

    Increases equilibrium price and decreases quantity. Leftward supply shift harms consumers with higher prices.

37. What is the equilibrium price?

    It is the price at which quantity demanded equals quantity supplied. The market-clearing price where curves intersect.

38. What is the result of an increase in income for an inferior good?

    Decreases demand, lowering both equilibrium price and quantity. Higher income decreases demand for inferior goods.

39. What is the result of an increase in income for a normal good?

    Increases demand, raising both equilibrium price and quantity. Higher income increases demand for normal goods.

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