book 2 (price determination)

Question 1

what is the definition of equilibrium

Answer 1

• the price at which demand meets supply and there is no tendency to change

Question 2

what is it called when demand exceeds supply and what is the effect of price

Answer 2

• excess demand
• upward pressure on price

Question 3

what is the function of price in a free market

Answer 3

• to bring the buyers and sellers together

Question 4

how do you calculate revenue

Answer 4

price x quantity

Question 5

what does a rise in price indicate to potential suppliers

Answer 5

they see an opportunity to make more profit (profit motive) and may reallocate resources towards supply

Question 6

what was adam smiths idea of the provision of labour and the invisible hand

Answer 6

• he believed that if you left markets alone, they will automatically re-allocate resources to their best use

Question 7

what are the 4 functions of a market in order

Answer 7

• signal
• incentivise
• ration
• allocate

Question 8

what is the function of signal in a market

Answer 8

• 1st function
• the price signals information to both buyers and sellers so they can plan and co-ordinate their actions

Question 9

what is the function of incentives in a market

Answer 9

• 2nd function
• an increase in price means their is potential for producers to earn more profits so this creates an incentive for firms to produce more and earn higher profits
• so supply extends

Question 10

what is the function of ration in a market

Answer 10

• 3rd function
• price rations the demand for a product
• if the price rises, consumers need more of the income to buy the product, so they have to ration by buying less or leaving the market completely
• so demand contracts

Question 11

what is the function of allocate in a market

Answer 11

• 4th function
• with a price rise, producers (sellers) have to reallocate their resources towards markets where there is excess demand and away from those of excess supply
• consumers have changed their pattern of consumption by buying less of higher paid products and reallocating their income to buying cheaper goods

Question 12

what is the structure when writing 9 markers

Answer 12

• draw an s&d diagram
• show the shift in supply and/or demand + new equilibrium
• analyse what caused the shift(s), explaining what the consequence is on price and/or quality of demand
• comment on both factors in the question
• use blt because, this leads to, therefore

Question 13

what does derived demand mean

Answer 13

• the demand for a factor of production used to produce another good or service, depends on the demand for their service

Question 14

what is composite demand

Answer 14

• where goods have more than one use- an increase in the demand for one product leads to a fall in supply for another

Question 15

what does cetirus paribus mean

Answer 15

all other things remain the same in a market