1.2.6 - price determination

Question 1

Where does equilibrium occur on a supply and demand diagram?

Answer 1

Equilibrium is where supply = demand

Question 2

What happens if supply is greater than demand?

Answer 2

There is excess supply/a surplus. The price is higher then the equilibrium price.

Question 3

What happens when demand is greater than supply?

Answer 3

There is excess demand/a shortage. The price is lower than the equilibrium price.

Question 4

What is FSPME?

Answer 4

F - factor
S - shift
P - price
M - movement
E - equilibrium

Question 5

What occurs when there is an increase in demand on a supply and demand diagram?

Answer 5

Demand shift right to D1. The price would rise from P to P1, causing an extension in quantity supplied. Equilibrium is established at S=D1.

Question 6

What occurs when there is a decrease in demand on a supply and demand diagram?

Answer 6

Demand shifts left to D1. Price would decrease from P to P1, causing an contraction in quantity supplied. Equilibrium is established at S=D1.

Question 7

What occurs when there is an increase in supply on a supply and demand diagram?

Answer 7

Supply shifts right to S1. Price would decrease from P to P1, causing an extension in quantity demanded. Equilibrium is established at D=S1.

Question 8

What occurs when there is a decrease in supply on a supply and demand diagram?

Answer 8

Supply shifts left to S1. Price increases from P to P1, causing a contraction in quantity demanded. Equilibrium is established at D=S1.