Price Determination (1.2.6)

Question 1

In a free market economy what are prices determined by?

Answer 1

The interaction of demand and supply in a market. Based on interaction between buyers, sellers will gradually adjust their prices until there is an equilibrium price and quantity that works for both parties

Question 2

What is price equilibrium? What does this look like on a graph?

Answer 2

When the supply is equal to demand. So this is where the demand and supply curves cross
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Question 3

What is this price also known as?

Answer 3

Market clearing

Question 4

What is Market Clearing?

Answer 4

Markets may not automatically find their equilibrium so prices need adjusting for supply to equal demand. This is called market clearing as we clear up any excess supply or Demand.

Question 5

What is market disequilibrium?

Answer 5

Refers to a situation where the quantity demanded and the quantity supplied in a market are not equal, leading to an imbalance in the market. In other words, it’s when the market is not at equilibrium.

Question 6

What does Market Disequilibrium cause?

Answer 6

Excess Demand or Supply

Question 7

If price is too high what will there be excess of?

Answer 7

Excess Supply

Question 8

What does excess supply look like on a graph?

Answer 8

The points will be above the point of equilibrium as the price will be too high which means the excess supply
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Question 9

If price is too low what will there be excess of?

Answer 9

Excess Demand

Question 10

What does excess demand look like on a graph?

Answer 10

The points will be below the point of equilibrium as the price will be too low which means there will be excess demand

Question 11

What will an increase in the demand of product do to the price and output?

Answer 11

Increase in demand will increase in price from p1-p2 which increases the output from q1 to q2.

Question 12

What will an decrease in the demand of product do to the price?

Answer 12

What will an decrease in the demand of product do to the price?

Question 13

What will an increase in the supply of product do to the output and price?

Answer 13

An increase in supply from S1 to S2 will increase output from Q1 to Q2 and decrease price from P1 to P2

Question 14

What will a decrease in the supply of product do to the output and price?

Answer 14

Decrease in supply would increase price and decrease output