1.2.6 Price Determination Flashcards
1
Q
What is the equilibrium?
A
When demand = supply
(market clearing price)
2
Q
How are prices determined?
A
Prices are determined by the interaction of demand and supply in a free market.
3
Q
What is a market?
A
A market is any place that brings buyers and sellers together.
4
Q
When does disequilibrium occur?
A
When there is an excess in demand or supply. Where demand does not equal supply.
5
Q
What are the stages of the price mechanism?
A
ARSI
1. Signals that price is too high/low
2. Incentives to change price to increase profit
3. Rations excess supply/demand
4. Allocates scarce resource
6
Q
When can excess supply occur?
A
If prices are too high or when demand falls unexpectedly.
7
Q
When can excess demand occur?
A
When prices are too low or if demand is too high.
