Micro- Economics (2.4)

Question 1

Price

Answer 1

The sum of money you have to pay for a good
or service. It is determined by the interaction
of supply and demand.

Question 2

Is price a reflection of worth?

Answer 2

Price is used to indicate worth but is not an accurate measure of worth in all cases. Some people may place more value on something depending on their circumstances.

Question 3

Explain the role of price in determining an efficient distribution of resources

Answer 3

The price of goods plays a crucial role in determining an efficient distribution of resources in a market system.

• Price acts as a signal for shortages and surpluses which help firms and consumers respond to changing market conditions.
• If a good is in shortage – price will tend to rise. Rising prices discourage demand, and encourage firms to try and increase supply.
• If a good is in surplus – price will tend to fall. Falling price encourage people to buy, and cause firms to try and cut back on supply.
  Prices help to redistribute resources from goods with little demand to goods and services which people value more.

Question 4

Explain what is meant by equilibrium price and quantity

Answer 4

Where the quantity supplied exactly matches the quantity demanded.

Question 5

Explain the role of markets in the determination of price

Answer 5

Markets bring buyers and sellers together. Supply and demand will interact to set the general price level for
a good or service. Market forces push prices up if there is an increase in demand or a fall in supply (excess demand) and pushes them down if demand falls or supply increases (excess supply).