1.3.4 price determination

Question 1

market equilibrium

Answer 1

a state where once reached there is no tendency for the price to change
achieved when qty demand = qty supplied

Question 2

equilibrium price,

Answer 2

equal to market clearing price
the price at which the demand of buyers equals to the supply from sellers
all the products are bought

Question 3

shortage

Answer 3

demand is greater than supply
price is too low
price will be driven upwards and producers will raise prices
—> extension in supply & contraction in demand

Question 4

surplus

Answer 4

supply is greater than demand
price is too high
price will be lowered
—> contraction in supply & extension in demand

Question 5

what forces prices to an equilibrium point?

Answer 5

1. market forces (mostly)
2. government legislation, monopolies, unions

Question 6

price mechanism

Answer 6

used to allocate between competing uses

Question 7

what are the 3 functions of price?

Answer 7

1. rationing
2. signalling
3. incentive

Question 8

signalling function

Answer 8

the market price acts as a signal to convey information to the participants of the market
- price reflects market conditions and helps to determine where and how resources should be allocated

Question 9

rationing function

Answer 9

there is scarcity + limited supply, so the goods/ services will be rationed to buyers that are prepared to pay a high enough price for it
- price acts to ration resources

Question 10

incentive function

Answer 10

low prices encourage consumers to purchase: get more utility per dollar spent
higher prices encourage suppliers to sell more to the market: higher price gives them an incentive to raise production because of higher potential profit

Question 11

consumer surplus

Answer 11

the positive difference between the price that a consumer is willing to pay, and the market gap between the equilibrium price and the demand lin
a form of gain, since consumers are paying less than they were prepared to

Question 12

producer surplus

Answer 12

the difference between the price a producer is willing to sell a good for, and the price actually received (market price)

Question 13

social surplus

Answer 13

the benefit to society of getting one more unit of the good is equal to the extra cots to society of producing one more unit of the good
- there is allocative efficiency and productive efficiency (no wastage of resources)

Question 14

how does an increase in demand affect PS & CS?

Answer 14

CS increase
PS increase

Question 15

how does a decrease in demand affect PS & CS?

Answer 15

CS decrease
PS decrease

Question 16

how does an increase in supply affect PS & CS?

Answer 16

CS increase
PS increase

Question 17

how does a decrease in supply affect PS & CS?

Answer 17

CS decrease
PS decrease