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Learn how market equilibrium is restored when prices increase or decrease, leading to shortages or surplus. Discover consumer and producer surplus, deadweight loss, and the impacts of fiscal and monetary policies on the economy.
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Restore market When Price has increased: • After shift to S1 if Price continues to stay at ‘P’, it will lead to a decrease in QS and increase in QD. • This leads to shortage (Excess Demand). • Consumers will bid prices up. • This then leads to Increase in QS (law of Supply) and decrease in QD (law of Demand). • This continues until New Equilibrium is reached and market restored.
Restore market When Price has decreased: • After shift to S1 if Price continues to stay at ‘P’, it will lead to an increase in QS and decrease in QD. • This leads to surplus (Excess Supply). • Producers will drop prices down. • This then leads to decrease in QS (law of Supply) and increase in QD (law of Demand). • This continues until Market is cleared. • New Equilibrium is reached and market restored.
CONSUMER,PRODUCER SURPLUS AND DWL • CS & PS must be always shown in total $Dollar value NOT price. • It is area of TRIANGLE not Price. • After Govt intervention, CS & PS lost or gained is NOT received by GOVT – that’s why we call it DWL – no one gets it. • Inefficiency – 3 points to remember: a) CS – PS NOT maximised b) CS-PS lost is not gained by anyone c) happens when there is outside interference in market
FISCAL; MONETARY • FISCAL: Govt revenue and expnditure decisions to influence economy • MONETARY: Control money supply, RBNZ and Interest rates • EXPANSIONARY MONETARY: Increase money supply, so lower OCR and Interest rate • CONTRACTIONARY FISCAL: Promote withdrawl from circular flow – either increase Revenue or reduce Spending
