Chapter 11: Market Equilibrium & Price Determination

Question 1

How are prices determined in a free market?

Answer 1

By the market mechanism - the interaction between demand and supply. Buyers and sellers trade at an agreed price.If they do not agree on the price then theydo not purchasethe good/service and are exercising theirconsumer sovereigntyBased on this interaction with buyers,sellerswill graduallyadjust their pricesuntil there is anequilibrium priceandquantitythat works for both parties

Question 2

Consumer sovereignty

Answer 2

The economic power exerted by consumers in a free market

Question 3

What happens at the equilibrium price?

Answer 3

At the equilibrium price,sellerswill be satisfied with therate/quantityof sales.
At the equilibrium price, theutility/pricecombination is maximised for the buyers

Question 4

Define utility

Answer 4

The satisfaction gained from a good/service

Question 5

Equilibrium price definition

Answer 5

The price at which there is no tendency to change because planned/desired purchases (demand) are equal to planned sales (supply).

Question 6

Excess demand definition

Answer 6

When demand is greater than supply, and there is no equilibrium achieved.I.E TOO MUCH DEMAND IN RELATION TO SUPPLY, LEADING TO A SHORTAGE OF PRODUCTS ON THE MARKETe.g it is not possible to buy some luxury bags (such as Birkins) without being on the waiting list for several years because CURRENT demand is too great.

Question 7

Excess supply definition

Answer 7

When supply is greater than demand, and there is no equilibrium achieved.I.E SURPLUS OF PRODUCTS ON THE MARKET.E.G 10 MILLION UNITS OF A PRODUCT WILL REMAIN UNSOLD, SHOPS USUALLY HAVE SALES AT THIS POINT BECAUSE THEY TRIED TO SELL THE GOOD AT A HIGHER PRICE AND FAILED.

Question 8

What is the equilibrium price also known as?

Answer 8

The market-clearing price because all the products supplied to the market are bought or cleared from the market

Question 9

When does excess demand occur?

Answer 9

When demand exceeds supply due to 1 of the following reasons:- Prices are too low- Demand is so high that supply cannot keep up with it (also applicable to price inelastic goods)

Question 10

What are dynamic markets?

Answer 10

Real world markets, which are always changing.Market equilibriumcan change every few minutes in some markets (e.g. stocks and shares), or every few weeks or months in others (e.g. clothing)Any change to acondition of demand or supplywill temporarily createdisequilibriumand market forces will then seek to clear theexcess demand or supply

Question 11

Free market forces

Answer 11

Forces in a free markets that act to reduce prices when there is excess supply and raise prices when there is excess demand