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An example is the collapse of trading in mortgage-backed securities during the recent financial crisis. (See the figure.) One of the challenges during a market freeze is the lack of mar-ket prices from which we can infer fair values.
The foundation of economics is the economizing problem: society's material wants are unlimited while resources are limited or scarce. Unlimited wants (the first fundamental fact): Economic wants are desires of people to use goods and services that provide utility, which means satisfaction.
When they see an economic issue or problem, they go through the theories they know to see if they can find one that fits. Then they use the theory to derive insights about the issue or problem. Economists express theories as diagrams, graphs, or even as mathematical equations.
- Market Equilibrium
- If Price Is Below The Equilibrium
- If Price Is Above The Equilibrium
Market equilibrium can be shown using supply and demand diagrams In the diagram below, the equilibrium price is P1. The equilibrium quantity is Q1.
In the above diagram, price (P2) is below the equilibrium. At this price, demand would be greater than the supply. Therefore there is a shortage of (Q2 – Q1)If there is a shortage, firms will put up prices and supply more. As price rises, there will be a movement along the demand curve and less will be demanded.Therefore the price will rise to P1 until there is no shortage and supply = demand.If price was at P2, this is above the equilibrium of P1. At the price of P2, then supply (Q2) would be greater than demand (Q1) and therefore there is too much supply. There is a surplus. (Q2-Q1)Therefore firms would reduce price and supply less. This would encourage more demand and therefore the surplus will be eliminated. The new market equilibrium will be at Q3 and P1.How price controls reallocate surplus. Price ceilings and price floors. Price and quantity controls. The effect of government interventions on surplus. Taxation and dead weight loss. Example breaking down tax incidence. Percentage tax on hamburgers. Taxes and perfectly inelastic demand.
- You are right over the short run, apple can enforce higher price on their products but over the long run the price will eventually shift to market...
- My interpretation would be that a voluntary transaction results when market price is at a point where at least one consumer is willing to pay (i.e....
- It would be better to say the sum. The sum of consumer and producer surplus can increase when there is deadweight loss. It is possible for either t...
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- No. It isn't. Producer surplus, for instance, can increase by far more than deadweight loss. Of course, that would mean that consumer surplus is de...
We can understand these changes by graphing supply and demand curves and analyzing their properties. Toilet paper is an example of an elastic good. Image courtesy of Nic Stage on Flickr. Keywords: Elasticity; revenue; empirical economics; demand elasticity; supply elasticity.
People also ask
What are the challenges during a market freeze?
Why do markets freeze?
What are some good books about credit market freezes?
What is the economic problem?
The economic problem is that unlimited wants exceed finite resources. Economic goods take resources to produce them. Free goods exist without the use of resources.
