KT5: 1.3.3 Price Determination, 1.3.4 Price Mechanism

Question 1

The equilibrium price

Answer 1

The equilibrium price – the price at which quantity supplied and quantity demanded are equal in a market, so there is no excess demand nor excess supply

Question 2

Market clearing

Answer 2

•Market clearing – obtaining a balance between quantity supplied and quantity demanded, normally by arriving at the equilibrium price. (i.e. The quantity that producers wish to sell equals the quantity that consumers wish to buy at that price

Question 3

Excess demand

Answer 3

Excess demand - When the quantity demanded outstrips the quantity supplied. There is a shortage of the product. Raising the price will cause the customers to buy less and so restore equilibrium.

Question 4

Excess supply

Answer 4

Excess supply - When the quantity supplied is greater than the quantity demanded. This disequilibrium would usually be caused by setting a price that is too high to attract enough customers to buy the quantity that suppliers are offering.

Question 5

Profit signalling mechanism

Answer 5

Profit signalling mechanism - refers to the way that potential profits will attract entrepreneurs to a growing market; losses will lead businesses to consider leaving a market.

Question 6

Ceteris paribus

Answer 6

Ceteris paribus - the assumption that all variable stay the same other than the one being studied.

Question 7

Signalling

Answer 7

Signalling - prices give signals to producers and consumers

Question 8

Rationing

Answer 8

Rationing - only those willing and able to pay the price gets the products or resources.

Question 9

Incentives

Answer 9

Incentives - profitability motivates firms, value for money motivates consumers

Question 10

Economic models

Answer 10

Economic models - use simplified assumptions to describe economics relationships. These allow us to isolate individual changes and analyse their consequences, avoiding the complications that occur when several things are changing at once.

Question 11

Allocation of resources

Answer 11

Allocation of resources - the way in which economic agents take decisions about what to buy, what to produce and how best to use the available land, labour and capital

Question 12

Price mechanism

Answer 12

Price mechanism - an economic model that helps to explain the allocation of resources between different possible uses. It shows how the “invisible hand” guides resources towards production of what consumers will buy.

Question 13

Homogenous

Answer 13

Homogenous - products are uniform, identical whatever their origin.

Question 14

Differentiated

Answer 14

Differentiated - products are distinctive, with different design features or branding.

Question 15

Mass market

Answer 15

Mass market - products are supplied in significant quantities to all or most types of customers.

Question 16

Oligopoly

Answer 16

Oligopoly - a market structure with a few large firms dominating the market. There are often smaller firms competing as well. Oligopolists are present in many mass markets.

Question 17

Market power -

Answer 17

Market power - firms acquire market power when they can differentiate the product and control the amount produced and the price charged

Question 18

Niche market

Answer 18

Niche market - a small segment of a market with distinctive, specialised requirements. They may be associated with subcultures - groups of people with common interests.