1.2.6 Price determination Flashcards
What is price determination?
In a free market economy, prices are determined by the interaction of demand and supply in a market.
What is equilibrium?
Equilibrium in a market occurs when demand = supply.
What is disequilibrium - excess demand?
Excess demand occurs when the demand is greater than the supply. It can occur when prices are too low or when demand is so high that supply cannot keep up with it.
Market response to excess demand?
/This market is in disequilibrium. Sellers are frustrated that products are selling so quickly at a price that is obviously too low. Some buyers are frustrated as they will not be able to purchase the product
/Sellers realise they can increase prices and generate more revenue and profits
/Sellers gradually raise prices. This causes a contraction in QD as some buyers no longer desire the
What is disequilibrium - excess supply?
Excess supply occurs when the supply is greater than the demand. It can occur when prices are too high or when demand falls unexpectedly.
Market response to excess supply?
/This market is in disequilibrium. Sellers are frustrated that the masks are not selling and that the price is obviously too high. Some buyers are frustrated as they want to purchase the masks but are not willing to pay the high price
/Sellers will gradually lower prices in order to generate more revenue. This causes a contraction in QS as some sellers no longer desire to supply masks. This causes an extension in QD as buyers are more willing to purchase masks at lower prices
