Micro: 1.2.6 Price determination Flashcards
What determines the equilibrium price and quantity?
The equilibrium price and quantity are determined where demand (D) and supply (S) intersect.
What happens if the price is above the equilibrium price?
If the price is above the equilibrium price, supply is greater than demand, resulting in excess supply, or a surplus.
What occurs if the price is below the equilibrium price?
If the price is below the equilibrium price, demand is greater than supply, causing excess demand or a shortage.
How do market forces respond to excess supply?
Market forces will result in a contraction in supply and an extension in demand, causing a fall in price to its market clearing level.
What happens when there is excess demand?
Market forces will result in an extension in supply and a contraction in demand, causing a rise in price to its market clearing level.
What is an example of excess supply?
An example is a flower seller who sets prices too high, resulting in unsold flowers at the end of the day.
This illustrates the concept of excess supply.
What should students examine in real-world markets?
Students should examine what is causing prices to change and use supply and demand diagrams to demonstrate shifts in equilibrium price and quantity.
What causes price rises?
Price rises are caused by increasing demand (shifting to the right) or decreased supply (shifting to the left).
What causes price falls?
Price falls are caused by decreasing demand (shifting to the left) or increased supply (shifting to the right).
Why is understanding commodity markets important?
Understanding commodity markets is important because they can exhibit volatile price changes due to inelastic demand and supply, such as in the oil market.
What is the impact of changes in the supply or demand for oil?
Any changes in the supply of oil or demand for oil will have a large impact on its price.
Draw a supply and demand digram
