1.2.6 Price determination

Question 1

What is market equilibrium

Answer 1

-Where demand and supply intersect
-In a free competitive market price and output are determined by the interaction of demand and supply

Question 2

What is excess supply

Answer 2

-A suplus
-When price is above price equilibrium then firms will supply more than consumers will demand

Question 3

How to clear the market when there is a surplus

Answer 3

-Price adjustment
-Producers reduce prices to sell unsold stocks
-Encourages and extension of demand
-Until equilibrium is reached

Question 4

What is excess demand

Answer 4

-A shortage
-Price is set below equilibrium so there is more demand than producers are willing to supply

Question 5

How to clear the market when there is a shortage

Answer 5

-Price adjustment
-Stocks sell out so producers are able to increase prices
-Contraction in demand
-Equilibrium price is reached

Question 6

What are commodities

Answer 6

-Goods which are uniform
-Indistinguishable from one another
-Most produced by primary sectors (some manufactured are semi conductors)

Question 7

Whats the difference between hard and soft commodities

Answer 7

Hard- can be stored (metals)
Soft- agricultural, not easily stored (milk)

Question 8

Why are commodities prices unstable

Answer 8

-Inelastic demand, used in production for other goods so demand is unresponsive to changes in price
-Inelastic supply, inability of producers to change supply and react to market changes due to volatile and unpredictable supply (weather, pests, natural disasters)

Question 9

Why is producing primary goods for international markets hazardous

Answer 9

-In free markets commodities aren’t allocated efficiently
-Unstable prices
-Unstable supply
-Primary producers cant survive when prices fall
-Consumers may face higher prices for food products