1.2.6, 1.2.7 Price determination and price mechanism

Question 1

Equalibrium Price

Answer 1

Where the demand and supply curve are equal
Qd = Qs

The point where the supply curve and demand curve intersect

Question 2

In free market

Answer 2

Price will adjust such that Qd and Qs are equal

Question 3

Equilibrium Excess suppy - surpluss

Answer 3

At higher prices theres more quantity being supplied then being demanded

Producers will decrease their prices to encourage consumers to buy more

Question 4

Equilibrium Ecess demand - Shortage

Answer 4

When the price of a good is below the equilibrium there is excess demand more quanitity is being demanded then supplied

consumers will then bid up the price until equalibrium is reached

Question 5

Price mechanism

Answer 5

the interaction of supply and demand to determine prices

also known as the invisible hand

Question 6

components of the price mechanism

Answer 6

• supply signalling
• supply incentivising
• demand signalling
• demand incentivising
• rationing

Question 7

Supply signalling

Answer 7

Falling price singals to producers to that consumers want less and so they reduce quantity supplied

Question 8

Supply incentivising

Answer 8

Falling price reduces incentivbe to supply as less profit can be made hence reducing supply

Question 9

demand Signalling

Answer 9

The rising prices signals to producers that consumers want more goods and so quantity supplied is increased

Question 10

Demand incentivising

Answer 10

The rising price provides an incentive to producers to supply more goods as more profit can be made

Question 11

Rationing

Answer 11

• The rising prices means fewer consumers are willing and able to demand at higher prices and so there is a contraction in demand.
• Only takes place when price increases