1.2.6 Price Determination and Price Mechanism

Question 1

What is meant by ‘market clearing’ price?

Answer 1

Market clearing price is the price at which Quantity Supplied is art an equilibrium with Quantity Demanded causing for there to be no excess supply or demand.

Question 2

What is meant by ‘equilibrium’?

Answer 2

Equilibrium is the point in the market where demand = supply.

Question 3

In a competitive market, what effect would it have on supply if a new supplier entered the market?

Answer 3

A new supplier would increase the supply in the market and cause price to fall.

Question 4

What is meant by joint demand or complimentary goods?

Answer 4

Complimentary goods are consumed together.

Question 5

Give an example of 2 goods in joint demand

Answer 5

Bread and Butter

Question 6

What is the impact on both products if there is an increase in the market price of one of the goods?

Answer 6

If the price of a good increases then consumers will demand less of that good meaning that the other good is not needed as much causing the demand to decrease.

Question 7

What is meant by a substitute?

Answer 7

A substitute is a good that can replace another good as it is an alternative.

Question 8

Give an examples of 2 goods that are substitutes.

Answer 8

An electric toothbrush and a standard toothbrush

Question 9

What is the impact on both products if there is an increase in the market price of one of the goods?

Answer 9

If the price of an electric toothbrush rises then the demand will fall, causing the demand to rise for the standard toothbrush which in turn raises the price.

Question 10

What is meant by composite demand?

Answer 10

Composite demand is demand for a good that has more than one use.

Question 11

Give an example of 2 goods that are in composite demand.

Answer 11

Oil- can be used for petrol and making plastics

Wood- can be used for construction and for house fires

Question 12

What is the impact on both products if there is an increase in demand for one of the goods.

Answer 12

If there is an increase in demand for plastic then there will be less oil used for petrol causing the supply of petrol will fall.

Question 13

What is meant by derived demand?

Answer 13

Derived demand is when the demand for a good is driven by the demand for another good.

Question 14

Give an example of a good whose demand is derived from another product.

Answer 14

The demand of steel is derived from the demand of construction and cars.

Question 15

What is the impact on both products if there is an increase in the market price of one good?

Answer 15

If the demand for cars increased then the demand for steel will increase as well as steel is required to make the cars

Question 16

What is meant by joint supply?

Answer 16

Joint supply is when one good is a by-product of another good and is therefore produced at the same time as the other good.

Question 17

Name 2 products that are in joint supply

Answer 17

Lamb and wool

Question 18

What is the impact on both products if there is an increase in supply of one of the goods?

Answer 18

If the supply of one lamb increases then the supply of wool will increase as well because there would be more sheep to harvest it from.

Question 19

What are the 3 functions of Price Mechanism?

Answer 19

Rationing function - Prices serve to ration scarce resourceswhenm market demand outstrips supply

Signalling function - Prices adjust to demonstrate where resources are required, and where they are not.

Incentive function - As the price of a product rises, the quantity supplied increases as the business respond