Price Determination

Question 1

Equilibrium price and quantity

Answer 1

-This is when supply meets demand. On the diagram this is shown by P1 and Q1.
-At market equilibrium, price has no tendency to change, and it is known as the market clearing price.

Question 2

Excess demand

Answer 2

-At Q2, price is at P2 which is below market equilibrium. Demand is now greater than supply, which can be calculated by Q3-Q2.

-This is a shortage in the market. This pushes prices up and forces firms to supply more, since prices increase, demand will contract.

-Once supply meets demand again, price will reach the market clearing price, P1.

Question 3

Excess supply

Answer 3

This is when price is above P1. Supply is at Q2 and demand is at Q1. There is a surplus of Q2-Q1. Price will fall back to P1 as firms lower their prices and try to sell their goods. The market will clear and return back to equilibrium.

Question 4

New market equilibriums

Answer 4

-When the demand or supply curves shift due to the PIRATES or PINTSWC reasons, new market equilibriums are established.

-For example if there was an increase in the population, demand would shift from D1 to D2.
-Price would increase to P2 and suppliers would supply a larger quantity of Q2. A new market equilibrium is established at P2 Q2.