2.5 + 2.6 + 2.7 + 2.8 - Price Determination, Changes and Elasticity

Question 1

Consumer sovereignty

Answer 1

Role of consumer as ruler of the market when determining the types of goods and services produced

Question 2

How is market equilibrium achieved?

Answer 2

• Buyers, sellers will gradually adjust their prices until there is an equilibrium price and quantity that works for both parties
  
  • at the equilibrium price, sellers will be satisfied with the rate/quantity of sales
  • at the equilibrium price, buyers are satisfied that the product provides benefits worth paying for

Question 3

Market equilibrium

Answer 3

Equilibrium in a market occurs when demand = supply

Question 4

Market clearing price

Answer 4

The price at which the amount supplied is equal to the amount demanded
- this is the price at which sellers are clearing (selling) their stock at an acceptable rate

Question 5

Excess demand

Answer 5

Excess demand occurs when the demand is greater than the supply
- it can occur when prices are too low or when demand is so high that supply cannot keep up with it

Question 6

Calculate excess demand

Answer 6

QD - QS = ED

Question 7

How does the market respond to excess demand? (sellers and buyers)

Answer 7

The market is in disequilibrium
- sellers: frustrated that they are selling so fast at a price too low
- buyers: frustrated that there is not enough produce to buy
- Sellers raise prices to generate more revenue (profit)
- causes a contraction in QD: loss of some buyers
- causes an extension is QS: other sellers are more incentivised to supply at higher prices
* Over time, excess demand will be cleared to reach an equilibrium again: can take different lengths of time

Question 8

Revenue

Answer 8

Price x Quantity

Question 9

Profit

Answer 9

total revenue - total cost

Question 10

Excess supply

Answer 10

Excess supply occurs when the supply is greater than the demand
- it can occur when prices are too high or when demand falls unexpectedly

Question 11

Surplus

Answer 11

A situation in which quantity supplied is greater than quantity demanded

Question 12

Market response to excess supply

Answer 12

The market is in disequilibrium
- sellers: frustrated that the product is not selling and the price is too high
- some buyers: frustrated that the price is too high and they don’t want to buy the product
* Sellers will lower prices to generate more revenue
- causes a contraction in QS as some sellers no longer desire selling the product
- causes an extension in QD as buyers are more willing to purchase at lower prices

Question 13

Demand and supply schedule

Answer 13

Assessment of the relationships among different levels of demand and supply at different price levels

Question 14

Dynamic market

Answer 14

A constantly changing market