1.2.6 Determination Of Market Prices

Question 1

Equilibrium price and quantity graph

Answer 1

The point where supply and demand curve intersect is market equilibrium/market clearing price
- At market equilibrium, the price has no tendency to change and it is known as the market clearing price

Question 2

Market clearing price

Answer 2

where the price has no tendency to change

Question 3

Price above equilibrium price graph

Answer 3

If price is above the equilibrium price P, supply is greater than demand and there is excess supply

Question 4

Price below equilibrium price graph

Answer 4

If price is below the equilibrium price, demand is greater than supply causing excess demand or a shortage

Question 5

What happens if there is excess supply?

Answer 5

Market forces will result in a contraction in supply and an extension in demand, causing a fall in price to its market clearing level eliminating in excess supply
(E.g a flower seller who set prices too high, will result in unsold flowers meaning they will need to reduce prices)

Question 6

What happens if there is excess demand?

Answer 6

Market forces will result in an extension in supply and a contraction in demand, causing a rise in price to its market clearing level eliminating in excess demand
(E.g a bread seller who sets prices too low, will result in everyone wanting to buy their bread meaning they will need to increase the price)

Question 7

How might the Govt cause excess demand?

Answer 7

Government schemes to cap prices below the equilibrium price will have an effect of creating excess demand. This causes a shortage of product

Question 8

Increased demand shifts…

Answer 8

…to the right

Question 9

Increase supply shifts…

Answer 9

…to the right

Question 10

Price rises are caused by…

Answer 10

…increasing demands or decreased supply

Question 11

Example of volatile price changes in market

Answer 11

• Demand is highly price inelastic for oil and supply is also price inelastic as it takes so long to discover new supply
• Any changes in the supply of oil or demand for oil will have a large impact on its price

Question 12

Shallow demand curve

Answer 12

• Quantity doesn’t change much for a given price change
• This is inelastic since it’s insensitive to price change
• E.g brand loyalty, necessities such as petrol)

Question 13

Steep demand curve

Answer 13

• Quantity changes a lot for a given price change
• This is elastic since it’s relatively responsive to price change
• E.g no brand loyalty,

Question 14

UK government intervention in the electric vehicle market

Answer 14

• The UK govt wants sales to increase (to help with climate change)
• the govt is assisting in offering plug-in grants to consumers buying electric vehicles

Question 15

Advantages of UK govt intervening in electric vehicle market

Answer 15

• subsidies can help meet climate change targets
• encourage economies of scale

Question 16

How can subsidies on electric vehicles help meet climate change targets?

Answer 16

• increase demand for electric vehicle (a subsitute for diesel cars)
• electric vehicles emit less carbon and NO2 than diesel cars
• negative externalities

Question 17

Evaluation of electric vehicles helping with climate change

Answer 17

• electric cars doesn’t necessarily make it more environmentally friendly
• depends on the sources from which electricity to charge vehicles comes
• some is from coal and gas fired power stations
• also car batteries impacct on environment (e.g lithium-ion batters use rare earths & processed creates toxic waste
• also ppl unlikely to switch

Question 18

How can subsidies of electric vehicle encourage economies of scale?

Answer 18

• achieve rapid growth in market demand = electric vehicle take an increasing market share = internal economies of scale
• improve productive and dynamic efficiency = lower prices
• also encourage futher investment e.g make electric buses & electric taxis more affordable for lower-income families

Question 19

Evaluation of subsidies of electric vehicle leading to economies of scale

Answer 19

• offering financial support = run up against supply contrainsts in the electric vehicle industry
• UK power station might not keep up with demand when/enough charging stations drivers charge their vehicles
• also subsidy is expensive = lower tax revenue

Question 20

Evaluation of subsidies

Answer 20

• economists are often wary of use of subsidies since it can distort price signals
• lead to govt failure
• however, the economic and social benefits of subsidy outweigh the risks in the long run

Question 21

The future of diesel cars in the UK

Answer 21

• The govt is planning to ban the sale of new petrol and diesel cars
• subsidies on this can accelerate the process
• however, at the minute, electric vehicles are not affordable