Topic 4 Market Equilibrium UPDATED
ACTUAL QUESTIONS AND CORRECT
ANSWERS
What is market equilibrium? - Correct answers✔✔A market situation that occurs at any price and
quantity where the quantity demanded and the quantity supplied are equal.
What happens when the market is not in equilibrium? - Correct answers✔✔#1 If the price is
above the equilibrium price....
Example: the price is at $2
the quantity supplied (13) > quantity demanded (7)
→ the market is in surplus (6)
→ to get rid of the excess supply, firms will lower the price of the good (price continues to fall
until equilibrium is attained)
#2 If the price is below the equilibrium price...
Example: the price is $1
the quantity demanded (15) > quantity supplied (6)
→ a shortage exists
→ to reduce the shortage, the firm will increase the price of the good until equilibrium is
attained.
Government Intervention - Correct answers✔✔PRICE CEILING (if govnt believes people are
paying too much)
PRICE FLOOR (if govnt believes sellers are receiving too little)
, Price Ceiling - Correct answers✔✔A legally established maximum price a seller can charge for a
good or service
Eg. rent control, maximum price on petrol
Why impose a price ceiling? - Correct answers✔✔Price ceiling is imposed when the current
equilibrium price is considered too high.
So for price ceiling to be effective, it must be set below the market equilibrium price
Result of price ceiling - Correct answers✔✔quantity demanded > quantity supplied
a shortage is created
*price cannot rise to bring market back to equilibrium
Price Floor - Correct answers✔✔a legally established minimum price a seller can be paid
Why implement a price floor? - Correct answers✔✔Price floors are imposed when the current
equilibrium price is considered to be too low
So for the price floor to be effective, it must be set above the market equilibrium price.
Result of price floor - Correct answers✔✔quantity supplied > quantity demanded
a surplus is created
*price cannot fall to bring market back to equilibrium
ACTUAL QUESTIONS AND CORRECT
ANSWERS
What is market equilibrium? - Correct answers✔✔A market situation that occurs at any price and
quantity where the quantity demanded and the quantity supplied are equal.
What happens when the market is not in equilibrium? - Correct answers✔✔#1 If the price is
above the equilibrium price....
Example: the price is at $2
the quantity supplied (13) > quantity demanded (7)
→ the market is in surplus (6)
→ to get rid of the excess supply, firms will lower the price of the good (price continues to fall
until equilibrium is attained)
#2 If the price is below the equilibrium price...
Example: the price is $1
the quantity demanded (15) > quantity supplied (6)
→ a shortage exists
→ to reduce the shortage, the firm will increase the price of the good until equilibrium is
attained.
Government Intervention - Correct answers✔✔PRICE CEILING (if govnt believes people are
paying too much)
PRICE FLOOR (if govnt believes sellers are receiving too little)
, Price Ceiling - Correct answers✔✔A legally established maximum price a seller can charge for a
good or service
Eg. rent control, maximum price on petrol
Why impose a price ceiling? - Correct answers✔✔Price ceiling is imposed when the current
equilibrium price is considered too high.
So for price ceiling to be effective, it must be set below the market equilibrium price
Result of price ceiling - Correct answers✔✔quantity demanded > quantity supplied
a shortage is created
*price cannot rise to bring market back to equilibrium
Price Floor - Correct answers✔✔a legally established minimum price a seller can be paid
Why implement a price floor? - Correct answers✔✔Price floors are imposed when the current
equilibrium price is considered to be too low
So for the price floor to be effective, it must be set above the market equilibrium price.
Result of price floor - Correct answers✔✔quantity supplied > quantity demanded
a surplus is created
*price cannot fall to bring market back to equilibrium
