Market Equilibrium

Question 1

Functions of the price mechanism

Answer 1

1. Signalling
2. Incentive
   (3. Rationing)

Question 2

How does price mechanism allocate scarce resources

Answer 2

• Resources re/allocated according to changes in price.
• If price rises due to higher demand, then signals to producers that consumers want to buy the good.
• Rational profit maximising producers respond to the higher profit ‘incentive’ and likely to produce more of the good.
• Higher price makes producers allocate more resources toward goods where demand is highest, since this is where they are able to make the most profit.

Question 3

Summarise how price mechanism allocates scarce resources

Answer 3

• Higher price makes producers allocate more resources toward producing goods where demand is highest, since this is where they are able to make the most profit.

Question 4

Describe market dynamics where price is above and below market clearing price.

Answer 4

Price above eq - excess supply, price bid down and firms contract supply to raise profits.

Question 5

Allocative efficiency condtions

Answer 5

• Qd = Qs

- Consumer welfare is maximised.

Question 6

Define market

Answer 6

A place where buyers and sellers can be to engage in exchange of goods and services