econ chapter 2.5 (Price determination)

Question 1

What are two ways prices are determined?

Answer 1

-direct bargaining between buyers and sellers

-firms estimate and then charge what they think is the equilibrium price. If they find they cannot sell all of their output at this price, they lower it. If demand becomes higher than supply, they will raise the price

Question 2

What do market prices move?

Answer 2

price towards the equilibrium.

Question 3

explain how market forces would respond to a shortage

Answer 3

Market forces address this imbalance through the price mechanism:

Price Increase: Excess demand leads to higher prices, signaling scarcity.

Supply Response: Higher prices incentivize producers to increase supply.

Demand Adjustment: Elevated prices discourage some consumers, leading to a decrease in quantity demanded.

This process continues until the market reaches a new equilibrium, where quantity supplied equals quantity demanded

Question 4

explain how market forces would respond to a surplus

Answer 4

This imbalance prompts the following market responses:

Price Reduction: Producers, aiming to sell excess stock, may lower prices to attract more consumers.

Increased Demand: As prices decrease, the product becomes more affordable, leading to an increase in quantity demanded.

Reduced Supply: Lower prices may reduce producers’ profitability, leading to a decrease in quantity supplied.

Question 5

definition of surplus

Answer 5

a surplus occurs when the quantity supplied of a good or service exceeds the quantity demanded at the prevailing market price.

Question 6

definition of shortage

Answer 6

A shortage occurs when the quantity demanded of a good or service exceeds the quantity supplied at the prevailing market price.