1.2.6 - Price Determination

Question 1

Define Market

Answer 1

. Any place where buyers meet suppliers to exchange goods / services at a market price

. It could be physical (i.e stall) or it could non - physical (i.e online shops such as eBay)

Question 2

Define Equilibrium

Answer 2

where demand = supply in a market

Question 3

Another name for Equilibrium

Answer 3

.Market Clearing Price

.It is called this all the products supplied to the market are bought or cleared from the market. No buyers are left frustrated in their wishes to buy goods

Question 4

Names for Price in Equilibrium

Answer 4

.P1 is called Equilibrium market price

. Also called market clearing price

Question 5

Names for Quantity in Equilibrium

Answer 5

Q1 is called Equilibrium market quantity

. Also called Market Clearing Quantity

Question 6

Define Disequilibrium

Answer 6

. When demand does not equal supply

. The price may be above or below the equilibrium

Question 7

Define Excess Demand

Answer 7

. When Demand is greater than supply

. There will be a shortage of products in the market

. This occurs when the market price is LOWER than the equilibrium market price

Question 8

Define Excess Supply

Answer 8

. When Supply is greater than Demand

. There will be a surplus of products in the market

. This occurs when the market price is HIGHER than than the equilibrium market price

Question 9

Explain what producers do when there is excess demand?

Answer 9

. In excess demand (demand higher than supply), producers increase their price to the market equilibrium price, and increase their profits and still sell all of their stocks.

. Buyers will competing with each other for scarce goods and suppliers will see that they have the opportunity to raise price. As price rises, demand will contract, but supply will expand, as the good is more profitable for producers

. This is all caused by free market forces

Question 10

Explain what producers do when there is excess supply?

Answer 10

. In excess supply (supply higher than demand), producers decrease their price to the market equilibrium price in order to sell all of their stocks. This will cause demand to expand, but supply will contract, as some producers will exit from the market as they can’t make a suitable profit

.If one producer decrease their price, other producer will also follow.

. If producers choose to not lower their prices, this causes greater pressure to reduce prices in the long run a there will be a large stock of unsold goods, which may cost money to store.

. This is all caused by free market forces

Question 11

Define free market forces

Answer 11

. The forces in free market , which act to reduce prices where the is excess supply and raise prices when there is excess demand