1.2.6 Price Determination

Question 1

Define market equilibrium

Answer 1

The price where quantity demanded equals the quantity supplied for a good or service in a market

Question 2

What is disequilibrium

Answer 2

Points where demand and supply are out of balance

Question 3

Define excess supply

Answer 3

Where the quantity supplied exceeds the quantity demanded for a good at the current market rice

Question 4

What happens during excess supply

Answer 4

Market forces will result in a contraction in supply and an extension in demand therefore causing a fall in price to the market clearing level

Question 5

Define excess demand

Answer 5

Where the quantity demanded exceeds the quantity supplied for a good at the current market price

Question 6

What happens during excess demand

Answer 6

Market forces will result in an extension in supply and a contraction in demand, causing a rise in price to its market clearing level

Question 7

How does an outward shift in demand cause an expansion of supply

Answer 7

• outward shift of demand
• increased willingness and ability to buy
• market can now sustain a higher price
• the higher price is an incentive for firms to expand production
• supply responds if there is spare capacity

Question 8

How does an inward shift in supply cause a contraction of demand

Answer 8

• inward shift or market supply
• scarcity of product on the market relative to current demand
• allows sellers to charge a higher price
• higher price is a signal for consumers to find ways of cutting demand
• higher prices causes a contraction up demand curve

Question 9

Define market demand

Answer 9

The sum of the individual demand for a product from buyers in the market

Question 10

Define individual demand

Answer 10

The price that a consumer is willing and able to pay for a good or service in each time period

Question 11

What factors cause an outward shift in market demand

Answer 11

• rising real disposable incomes
• growing total size of population
• changes in the age structure of a population
• availability of credit and the cost of credit
• rising relative prices of substitutes
• falling prices of complements
• changing consumer tastes and preferences
• speculative demand

Question 12

Define market supply

Answer 12

Sums the supply of all individual supplies in a market

Question 13

What factors cause an outward shift in market supply

Answer 13

• an industry wide fall in supply costs such as energy
• the entry of new suppliers into a market or industry
• impact of widely adopted process innovations that lower supply costs
• government subsidies
• impact of existing firms scaling up production in the long run
• effects of a market being opened to trade with lower cost of imports