Equilibrium prices

Definition

Equilibrium prices refer to the market-clearing prices at which the quantity supplied and quantity demanded of a good or service are equal, resulting in a stable market where there is no tendency for prices to change.

5 Must Know Facts For Your Next Test

1. Equilibrium prices are determined by the intersection of the supply and demand curves, where the quantity supplied equals the quantity demanded.
2. When a market is in equilibrium, there is no tendency for prices to change, as the forces of supply and demand are balanced.
3. Protectionist policies, such as tariffs or quotas, can distort the equilibrium price by creating a wedge between the price paid by consumers and the price received by producers.
4. The introduction of a tariff or quota shifts the supply curve, leading to a new equilibrium price that is higher for consumers and lower for producers.
5. This price distortion results in an indirect subsidy from consumers to producers, as consumers pay more for the good while producers receive a higher price.

Review Questions

• Explain how equilibrium prices are determined in a market and how they are affected by protectionist policies.
  • Equilibrium prices are determined by the intersection of the supply and demand curves, where the quantity supplied equals the quantity demanded. This represents a stable market equilibrium with no tendency for prices to change. However, protectionist policies, such as tariffs or quotas, can distort the equilibrium price by creating a wedge between the price paid by consumers and the price received by producers. This price distortion results in an indirect subsidy from consumers to producers, as consumers pay more for the good while producers receive a higher price.
• Analyze the impact of a tariff on the equilibrium price and the resulting distribution of the burden between consumers and producers.
  • The introduction of a tariff on a good shifts the supply curve to the left, leading to a new equilibrium price that is higher for consumers and lower for producers. This price distortion creates an indirect subsidy from consumers to producers, as consumers pay more for the good while producers receive a higher price. The magnitude of the burden on consumers and the benefit to producers depends on the elasticities of supply and demand, with more inelastic markets resulting in a greater share of the burden falling on consumers.
• Evaluate the welfare implications of protectionist policies, such as tariffs and quotas, on the overall economic efficiency and distribution of gains and losses.
  • Protectionist policies, like tariffs and quotas, distort the equilibrium price and create inefficiencies in the market. While they may benefit domestic producers, they come at the expense of consumers, who pay higher prices. This results in a deadweight loss to society, as the gains to producers are outweighed by the losses to consumers. Additionally, the distribution of the burden is often unequal, with a larger share falling on consumers. From an economic welfare perspective, free trade and undistorted equilibrium prices generally lead to a more efficient allocation of resources and a more equitable distribution of gains and losses.

Related terms

Supply and Demand: The economic model that explains how prices are determined through the interaction of supply (what producers are willing to sell) and demand (what consumers are willing to buy).

Surplus: A situation where the quantity supplied exceeds the quantity demanded at the current price, leading to a buildup of unsold inventory.

Shortage: A situation where the quantity demanded exceeds the quantity supplied at the current price, leading to a scarcity of the good or service.