Determination of equilibrium market prices

Question 1

Market disequilibrium

Answer 1

At any price other than the equilibrium price, when either planned demand < planned supply(price falls), or planned demand> planned supply(price rises)

Question 2

Excess supply

Answer 2

When firms wish to sell more than consumers wish to buy, with the price above the equilibrium price

Question 3

Excess demand

Answer 3

When consumers wish to buy more than firms wish to sell, with the price below the equilinrium price

Question 4

Ways to establish equilibrium in the market

Answer 4

Auctions- each bidder has an intrinsic value for the item being auctioned, the bidder’s willing to purchase the item for a price up to this value, but not for any higher price:
Ascending-bid auctions: Seller gradually raises the price, bidders drop out until only one bidder remains, and that bidder wins the object at this final price
Descending-bid auctions: seller gradually lowers the price from a high initial value until the first moment when a bidder accepts and pays the current price.
First price sealed-bid auctions:
Bidders submit simultaneous ‘sealed bids’ to the seller, with the highest bidder winning the object and paying the value of their bid

Question 5

Impact of direct and indirect taxes

Answer 5

An indirect tax imposed on firms shifts the supply curve of a good, whereas income tax shifts the demand curve for
a good by reducing consumers’ incomes

Question 6

What do changes in the market price in a competitive market do?

Answer 6

In a competitive market, changes in the market price eliminate excess demand or excess supply: this is how the price mechanism helps to allocate scarce resources

Question 7

Shifted incidence of tax

Answer 7

Part of tax passed on to consumers

Question 8

Unshifted incidence of tax

Answer 8

Part of tax borne by firms and producers