1.2.6 Price Determination ✅

Question 1

What two forces guide the price/quantity?

Answer 1

Demand and supply.

Question 2

What is the equilibrium point also known as?

Answer 2

Market clearing point. All goods are bought and no one is unable to buy it.

Question 3

Draw an excess demand diagram?

Question 4

Draw an excess supply diagram? (prices too high)

Question 5

Explain the markets response to a disequilibrium of excess supply?

Answer 5

Firms will gradually lower the prices to gain revenue. (Causes contraction in S - some firms no longer desire to supply masks and an extension in quantity demanded).

Question 6

Give a real world example of shifts in demand and supply changing the equilibrium point?

Answer 6

Demand = for sofas and comfy working spaces went up in Covid (shifted right) making original market price too low causing excess demand. Suppliers raised prices (extension in suppliers and contraction in quantity demanded).