1.2.6 Price determination

Question 1

Equilibrium price and quantity and how they are determined

Answer 1

the equilibrium price refers to the point at which there no more market forces (Adam smith invisible hand) bring about change

the equilibrium price is where supply is equal to demand (allocatively efficient quantity)

Question 2

The use of supply and demand diagrams to depict excess supply and excess demand

Answer 2

excess demand would be when there is a price set below the equilibrium price as a lot of consumers are willing to pay this price but some suppliers aren’t willing to sell for this price

excess supply would be when there is a price set above the equilibrium price as a lot of suppliers are willing to sell for this price but some consumers aren’t willing to pay this price

Question 3

The operation of market forces to eliminate excess demand and excess supply

Answer 3

when there is excess demand firms know they can still charge higher prices and still sell their goods, so this will cause an extension on supply and then a contraction in demand which will return prices to the equilibrium

when there is excess supply firms still have unsold goods, this will encourage them to increase sales to sell the excess this will cause a contraction in supply and then a extension in demand which will return prices to the equilibrium

Question 4

The use of supply and demand diagrams to show how shifts in demand and supply curves cause the equilibrium price and quantity to change in real-world situations

Answer 4

we know that