price determination

Question 1

what is the emphasis of free market (2)

Answer 1

individual freedom
and resource allocation

Question 2

what are equilibrium price and quantity determined by

Answer 2

the intersection of the demand and supply curves

Question 3

what is price mechanism used for?

Answer 3

to help disequilibrium go to equilibrium

Question 4

what are the price mechanisms (ARSI)

Answer 4

allocating
rationing
signalling
incentive

Question 5

effect of allocation mechanism of price

Answer 5

Prices signal the relative scarcity of goods and services. Higher prices indicate a good is relatively scarce, while lower prices suggest abundance

Question 6

effect of rationing mechanism of price

Answer 6

When demand for a good or service exceeds supply at the prevailing price, a shortage arises. The price mechanism acts as a rationing tool in this situation, thus price rises

Question 7

effect of signalling mechanism of price

Answer 7

a rising price might signal increasing demand or decreasing supply
a falling price might signal a decrease in demand or an increase in supply

Question 8

effect of incentive function of price

Answer 8

basically assumptions of rationality. consumers are incentivized by the lowest prices, producers at highest

Question 9

how to control excess demand

Answer 9

rise prices

Question 10

what does raising/falling price do when controlling excess demand/supply (2)

Answer 10

signals excess/falling demand and need for resources
incentivizes producers to produce more/less

Question 11

what happens to market when excess demand occurs

Answer 11

leads to competition among buyers
potentially driving the price up. continues until a new equilibrium is reached where quantity demanded equals quantity supplied.

Question 12

how to control excess supply (4)

Answer 12

subsidies
export promotion
government can purchase
downward pressure, Price Reduction

Question 13

what does equilibrium represent?

Answer 13

allocative efficiency

Question 14

effect of price change on consumer surplus

Answer 14

if price rises, consumer surplus decreases

Question 15

effect of price change on producer surplus

Answer 15

if price rises, producer surplus rises

Question 16

limitations of price mechanisms (3

Answer 16

• does not take into account externalities
• can also lead to inequality. Those who have the ability to pay for goods and services can acquire them, while those who cannot afford them are left out.
• Market failure occurs when the market fails to allocate resources efficiently. This can happen when there is a lack of competition, externalities, or public goods.

Question 17

what are the types of tax (2)

Answer 17

direct (like income tax) and indirect (VAT)

Question 18

types of indirect tax (2)

Answer 18

• specific tax
• ad valorem tax

Question 19

impact of indirect tax on consumers

Answer 19

consumers face higher cost of products

Question 20

impact of indirect tax on producers

Answer 20

face higher cost and gain lesser profits.

Question 21

impact of indirect tax on government

Answer 21

gains tax revenue

Question 22

when does incidence/burden of tax fall entirely on consumers (2)

Answer 22

perfectly elastic supply
perfectly inelastic demand

Question 23

why does incidence/burden of tax fall entirely on consumers when supply is perfectly elastic

Answer 23

When supply is perfectly elastic, producers have the power to adjust production to avoid absorbing the tax cost. They can raise prices with minimal impact on sales because consumers have alternatives

Question 24

why does incidence/burden of tax fall entirely on consumers when demand is perfectly inelastic

Answer 24

with perfectly inelastic demand, consumers are stuck and can’t easily switch to avoid the price hike, so they shoulder the entire burden.

Question 25

when does incidence/burden of tax fall entirely on producers(2)

Answer 25

relatively elastic demand (eh)
perfectly inelastic supply

Question 26

why does incidence/burden of tax fall entirely on producers when supply is perfectly inelastic

Answer 26

when producers have absolutely no ability to increase production in response to a price change.

Question 27

why does it matter who the tax burden falls on? (3)

Answer 27

• price effects
• efficiency
• fairness

Question 28

price effects (tax)

Answer 28

If the tax falls on producers (inelastic supply) they may absorb some of the cost, but often they raise prices to compensate.
Conversely, if consumers shoulder the tax (elastic demand), they may buy less, pressuring producers to lower prices.

Question 29

efficiency and effect of tax

Answer 29

If a tax discourages production or consumption too much, it can reduce overall economic efficiency.

Question 30

fairness and effect of tax

Answer 30

should profit making businesses be charged or consumers that can afford it - taxes help create fairness or can divide

Question 31

categories of tax (3)

Answer 31

progressive
proportional
regressive

Question 32

The impact of subsidy on consumers

Answer 32

Consumers gain lower price of products

Question 33

The impact of subsidy on producers

Answer 33

receive money from the government. It can be spent on machines to
lower cost and gain higher profits.

Question 34

impact of subsidy on government

Answer 34

opportunity cost // higher expenses