1.2.6-1.2.8 Flashcards
How are prices determined in a Free Market?
Prices are determined by the interaction of demand and supply.
What is Equilibrium?
Demand = Supply
Also known as Market Clearing.
Define Price Mechanism?
The interaction of Demand and Supply in a market.
What are the 4 Functions of Price Mechanism?
S - Signal
I - Incentive
R - Rationing
A - Allocation
What is the Signalling Function?
Prices signal an excess in supply or demand.
What is the Incentive function?
Prices changing, provide an incentive for producers to increase or decrease output. In order to maximise profits.
What is the Rationing function?
Scares resources are going to be rationed by either encouraging or discouraging consumption.
What is the Allocation of resources?
After the previous three functions are fulfilled then resources are allocated efficiently.
What is Consumer Surplus?
The difference between the price consumers are willing and able to pay and the price they actually pay.
Where can Consumer surplus be found?
Below the demand line and above price.
What is Producer surplus?
The difference between the price that producers are willing and able to supply a good for and the price they receive.
Where is Producer Surplus found?
Above the supply line and below the price line.
