1.2.6 Price Determination

Question 1

What is market equilibrium?

Answer 1

Where the quantity demanded by consumers is balanced with the quantity supplied by firms

Question 2

What occurs when the price is below the equilibrium point?

Answer 2

There is excess demand

Question 3

What occurs when the price is above the equilibrium point?

Answer 3

Excess supply

Question 4

How does a market adjust for an excess demand?

Answer 4

There will be an extension along the supply curve and a contraction along the demand curve. Firms will then increase their prices to ration demand

Question 5

How does a market adjust for excess supply?

Answer 5

There is a contraction along the supply curve and an expansion along the demand curve. Firms will then decrease the price of their goods in order to sell their goods.

Question 6

What happens if there is an improvement in technology for a firm in terms of price determination?

Answer 6

There will be a shift to the right in the supply curve as firms can sell more at a given price.
If the price remained the same, there would be excess supply.
There will be a contraction along the supply curve, and an extension along the demand curve resulting in a fall in the price

Question 7

What would happen to the market of a good if there is a positive change in consumer preferences?

Answer 7

The demand curve would shift to the right.
If the price remained the same, there would be excess demand.
There will be an expansion along the supply curve and a contraction along the demand curve resulting in the increase of price