1.2.6 - Price Determination Flashcards
1
Q
Equilibrium point
A
- The point at which supply is equal to demand.
2
Q
Price determination
A
The process of how the forces of demand for goods/services and the supply of goods/services in a market interact to determine the price.
3
Q
Disequilibrium
A
An economic situation characterised by a shortage or excess demand or supply.
4
Q
Excess Supply
A
5
Q
Excess demand
A
6
Q
What’s a market ?
A
A market is any place that brings buyers and sellers together. Markets can be physical (e.g. Waterstones) or virtual (e.g. eBay).
7
Q
What are the three functions of price ?
A
- Rationing function
- Signalling function
- Incentive function
8
Q
Rationing function
A
- Prices allocate (ration) scarce resources. When resources become scarcer the price will rise further. Only those who can afford to pay for them will receive them. If there is a surplus then prices fall and more consumers can afford them.
9
Q
Signalling function
A
- Prices provide information to producers & consumers where resources are required (in markets where prices increase this indicates indicates to produce more to supply) & where they are not (in markets where prices fall this indicates that there is).
10
Q
Incentive function
A
- When prices for a good/service rise, it incentivises producers to reallocate resources from a less profitable market to a more profitable market in order to maximise their profits. Falling prices incentivise reallocation of resources to new markets .
- Also it incentivise people to work hard. Buyers realsies that the more money they have the more products that they are able to buy.
11
Q
Explain this diagram using:
1. Signalling
2. Rationing
3. Incentivising
A
12
Q
Explain this diagram using:
1. Signalling
2. Rationing
3. Incentivising
A
