1.2.6 price determination market equilibrium Flashcards
what is a free market?
its any place where buyers meet suppliers to exchange goods and services, free from government interventions
what is equilibrium in supply and demand?
is where supply equals demand and the market is in its clearing position as the market is clear of excess demand and supply
this is known as allocative efficiency
what is disequilibrium in supply and demand?
its where demand doesn’t equal supply and there is no market clearing or allocative efficiency.
prices change depending on excess demand and supply?
what influences price change?
ARSI
allocate scarce resources effeciently
ration scarce resources by encouraging or discouraging consumption
signal excess demand or supply and need for more or less resources
Incentivise producers to increase or decrease output to up profits
where is excess demand located on graph and what happens?
explain with ARSI
It is located below the equilibrium
excess demand will occur also known as shortage and disequilibrium will occur
excess demand causes prices to rise which wall cause expansion in graph to reach equilibrium
Where is excess supply located on the graph and what happens?
explain with ARSI
it is located above the equilibrium
excess supply will occur as it is not allocative causing disequilibrium
there is as surplus in the market meaning too much stock
naturally excess supply will cause prices to fall as stock must be gone
contraction will occur in supply and demand
What happens if there is excess demand?
Signals the firms that prices are low
Incentive for fun to change price and increase to make profit from demand so they’re trying to desatisfy some demand
Excess demand has been rationed away
Scarce resources,reallocated
What happens if there is excess supply?
Signals to firms that price is too high as there is excess stock
Incentive for producers to lower price sell and make profit
Supply is being rationed away
Resources have been allocated to a lower price, high quantity and new equilibrium
