price determination

Question 1

when supply meets demand?

Answer 1

able to predict and explain price and quantity for any good or service

Question 2

when price goes up

Answer 2

contraciton in demand and extension in supply

Question 3

when price goes down

Answer 3

extension in demand, contraction in supply

Question 4

excess supply/ surplus

Answer 4

surplus, gap between supply and demand

Question 5

how to reduce excess supply

Answer 5

decrease price to increase quantity demanded, going on sale to sell off

Question 6

equilibrium

Answer 6

when quantity supplied meets quantity demanded

Question 7

price levels on supply and demand diagram

Answer 7

at higher prices, more quantity supplied than demanded so excess supply/ surplus
so to elimate producers decrease price to reach equilibrium price

Question 8

excess demand/shortage

Answer 8

gap below equilibrium curve, more is being demanded than supplied thus a shortage

Question 9

how to get rid of shortage

Answer 9

people willing to pay more for the good as it is in excess demand, so producers increase price of good,

they will offer a higher price

consumers bid up the price

rising prices leads to extension in supply

Question 10

price is above equilibrium

Answer 10

there is surplus

Question 11

price is below eqilibrium

Answer 11

shortage

Question 12

what is price mechanism

Answer 12

interaction of supply and demand to determine prices

Question 13

functions of price mechanism

Answer 13

signalling
incentivising
rationing

Question 14

how does the signalling function work

Answer 14

e.g. a surplus would indicate to consumers that producers are not willing to pay the price set for the good-signals to producers that consumers want fewer goods- so they reduce the quantity they supply- to move back to equilibrium

e.g. signalling, consumers bidding to up the price, rising prices signal to customers that consumers want more goods, incentivises consumers to increase quantity supplied

Question 15

how does the incentivisng function work

Answer 15

falling prices, reduces incentive to supply as less profit is being made. leading to reduction in quantity supplied- moving back towards equilibrium
production decreases leading to contraction in supply

rising prices provide incentive to supply more as more profit can be made thus extension in supply

Question 16

how does rationing function work

Answer 16

rising prices mean fewer consumers are willing and able to demand at higher prices- this rations/ limits quantity demanded so contraction in demand
- its rationed to those consumers who can only pay those higher prices

only occurs when price increases

Question 17

market equilibrium

Answer 17

when supply meets demand

Question 18

Excess supply (or surplus)

Answer 18

When the price is above the equilibrium price, the quantity supplied will exceed the quantity demanded leading to excess supply (or a surplus).

Question 19

Excess demand (or shortage)

Answer 19

When the price is below the equilibrium price, the quantity demanded will exceed the quantity supplied, leading to excess demand (or a shortage).

Question 20

Price mechanism

Answer 20

The interaction of supply and demand to determine the price in a market.

Now it’s your turn.

Question 21

Functions of the price mechanism

Answer 21

SIR

Signalling: higher prices signal to producers that consumers want more of their goods, so producers supply more of them. Lower prices signal to producers that consumers want fewer of their goods, so producers supply fewer of them.

Incentivising: higher prices increase the incentive to supply, because producers can make more profit. Lower prices decrease the incentive to supply, because producers make less profit.

Rationing: higher prices ration (or limit) goods to the consumers who will pay the most.

Question 22

how to correct an increase in demand

Answer 22

firms will increase price knowing consumers are willing to pay higher prices,
signals that consumers demand more than what is supplied so will increase prices
incentivises firms to supply as they are aware they will get higher profits
rationing- the high price can limit goods to consumers who pay most decreasing higher quantity to equilibrium

e.g. plane tickets are more expensive in july than in january

or glastonbury and reading festivals- cost over 200, popular vs lakefest- very scare only 30

central london homes 1.6 million vs scottish valleys- homes only 160k

Question 23

correct decrease in demand

Answer 23

producers decrease price to sell off goods,
decreasing price signals firms to supply less
this reduces incentive to supply
contraction in supply
(also increases quantity demanded because people will buy more at lower prices)

thus new equilibrium at lower price

e.g. movies and videogmaes initial price is high after immediate release, after time it becomes old and loses popularity so lower price

Question 24

correcting an increase in supply

Answer 24

excess supply in market is a surplus, gap between the quantity that is being demanded and what is supplied

=disquilibrium

decrease price to sell off excess surplus
decreasing price signals producers to supply less
this reduces incentive to supply
contraction in supply
(but also increases quantity demanded as low price means more goods bought)
=
new equilibrium at lower price

quantity supplied decreases along the supply curve

equilibrium price decreases, quantity increases

if competing with other producers you may decrease your price
e.g. ebay- lots of supply from 1.3 million sellers, prices much lower than high street shops

Question 25

correcting decrease in supply

Answer 25

shortage of good, consumers will bid up the price.
signals and incentivises suppliers to supply more
leads to extension in supply
(also rations how much consumers demand so also contraction in demand)
= new equilibrium at higher price

equilibrum price increases and quantity decreases