Key Concepts

A market is in equilibrium when the plans of all buyers and sellers match: at the equilibrium price the quantity consumers wish to buy exactly equals the quantity firms wish to sell, so the market clears with ne …

At a given price, excess demand is the amount by which the quantity demanded exceeds the quantity supplied. It arises whenever the price is below the equilibrium price and tends to push the price up …

At a given price, excess supply is the amount by which the quantity supplied exceeds the quantity demanded. It arises whenever the price is above the equilibrium price and tends to push the price dow …

The marginal revenue product of labour ($MRP_L$) is the extra revenue a firm earns by employing one more unit of labour. It equals the marginal product of labour times the marginal revenue from selling the extra output ($MRP_L = MR \times MP_L$); a profit-maximising firm hires labou …

The value of the marginal product of labour ($VMP_L$) is the price of the good multiplied by the marginal product of labour ($VMP_L = \text{price} \times MP_L$). For a perfectly competitive firm, where marginal revenue equals price, the marginal revenue product of l …

A price ceiling is a government-imposed upper limit on the price of a good or service. When set below the equilibrium price — as on necessities such as wheat, rice, kerosene or sugar — it creates an excess demand (shortage) that …

A price floor is a government-imposed lower limit on the price of a good or service. When set above the equilibrium price — as with agricultural price-support programmes or minimum-wage legislation — it creates an excess supply (surplus), …