1.2.6 price determination market equilibrium

Question 1

what is a free market?

Answer 1

its any place where buyers meet suppliers to exchange goods and services, free from government interventions

Question 2

what is equilibrium in supply and demand?

Answer 2

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

Question 3

what is disequilibrium in supply and demand?

Answer 3

its where demand doesn’t equal supply and there is no market clearing or allocative efficiency.

Question 4

prices change depending on excess demand and supply?

what influences price change?

Answer 4

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

Question 5

where is excess demand located on graph and what happens?

explain with ARSI

Answer 5

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

Question 6

Where is excess supply located on the graph and what happens?

explain with ARSI

Answer 6

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