4.1.3.5 - Equilibrium

Question 1

Define equilibrium

Answer 1

When the demand is equal to supply, meaning there is no shortage or surplus

Question 2

Define disequilibrium

Answer 2

Any point when the demand is not equal to the supply

Question 3

Causal chain structure for a 9 mark Q

Answer 3

• the (d/s) curve has shifted
• at initial price, there is disequilibrium, causing an excess (d/s)
• excess (d/s) caused prices to (^/v)
• firms incentivised to produce (more/less), why, (contraction/ extension) along supply curve. Consumers are incentivised to buy (less/more), why, (contraction/extension) along demand curve
• in this market, equilibrium moved from (q1,p1) to (q2,p2). (^/v) in (d/s) caused price to (^/v) ad quantity to (^/v)

Question 4

Define equilibrium price

Answer 4

The price of a product at which demand is equal to supply

Question 5

Define equilibrium quantity

Answer 5

The amount of a good or service in which the supply is equal to the demand

Question 6

Define free market forces

Answer 6

Interaction of demand and supply determines the price and quantities of a product in the market without government intervention.

Question 7

What are the 3 price functions

Answer 7

• signalling function
• incentive function
• rationing or allocative function

Question 8

What is the incentive function

Answer 8

High prices incentive firms to produce more, as they seek higher prices therefore higher profit.

Lower prices may incentivise consumers to purchase more, as they seek to maximise their utility by seeking goods and services at their lowest possible price.

Question 9

What is the signalling function

Answer 9

Prices carry information that is used by consumers and producers to make market plans

Question 10

What is consumer surplus

Answer 10

The difference between how much buyers are prepared to pay for a good and what they actually pay.
Ir occurs when the price that consumers are willing to pay is higher than what they are paying

Question 11

What is producer surplus

Answer 11

the difference between the market price which firms receive and the price at which they are prepared to supply at. Usually the price they are prepared to sell at is higher than the market price, so product surplus represents the benefit the producer receives from selling the products

Question 12

What does consumer surplus demonstrate

Answer 12

• social welfare

Question 13

What happens when at a disequilibrium

Answer 13

Welfare is lost