Price determination

Question 1

What is market equilibrium price ?

Answer 1

where demand = supply aka the market clearing price

Question 2

Why is it called the market clearing price ?

Answer 2

this is the price all products are being sold at and buyers and sellers are happy therefore all products can be bought and the market can be cleared

Question 3

What happens if there is a change in supply or demand ?

Answer 3

there will be a new equilibrium price

Question 4

How do you find the market equilibrium price ?

Answer 4

where the supply and demand curve cross

Question 5

What happens if there is excess supply
?

Answer 5

firms would need to lower prices

Question 6

What would buyers demand and sellers wish to supply if there is excess supply ?

Answer 6

buyers would demand lower quantity and sellers would wish to supply a larger quantity

Question 7

How do you work out excess supply ?

Answer 7

Total supply - supply demanded

Question 8

What would happen if there was excess demand ?

Answer 8

Firms could raise prices as sellers would demand a higher quantity whilst suppliers wish to sell a lower quantity

Question 9

How do you work out excess demand ?

Answer 9

Highest amount demanded - amount can be supplied

Question 10

What do market forces do ?

Answer 10

Always push to equilibrium

Question 11

What does too much supply mean ?

Answer 11

Lower prices

Question 12

What does too much demand mean ?

Answer 12

higher prices

Question 13

What do price changes cause ?

Answer 13

a movement along the supply / demand curve

Question 14

What does a change in any other determinant mean ?

Answer 14

a shift on supply/demand curve

Question 15

What does above the equilibrium price mean ?

Answer 15

excess supply

Question 16

What does below the equilibrium price mean ?

Answer 16

excess demand

Question 17

What cause shifts in supply ?

Answer 17

cost of production
technology
price of other goods/services
tax and subsidies
other factors (expectations)

Question 18

What causes a shift in demand ?

Answer 18

population
income
related/compliment goods
advertising
tastes
expectations
seasons

Question 19

What happens if there is a shift inwards in demand ?

Answer 19

decrease in demand and the curve shifts down and left

Question 20

What happens to the price and quantity if there is an inwards shift in demand ?

Answer 20

the price will decrease as well as the quantity demanded to find the new market equilibrium price

Question 21

What does a shift in demand lead to ?

Answer 21

a movement along the supply curve

Question 22

What does an inward shift in supply mean ?

Answer 22

an increase in supply and the curve will shift down and right

Question 23

What will happen to price and quantity if supply shifts inwards ?

Answer 23

the price will fall and quantity supplied will rise

Question 23

What does a shift in supply lead to ?

Answer 23

a movement along the demand curve

Question 24

What are the limitations of the supply and demand model and its predictions ?

Answer 24

it only looks at competitive markets
Ceteris Paribus
extrapolating microeconomic info to look at goods and services that have large markets
information tends to be asymmetric

Question 25

Why does it matter that the supply and demand model only looks at competitive markets ?

Answer 25

in the real world the degree of competition in the market varies

Question 26

Why does it matter that the supply and demand model uses Ceteris Paribus ?

Answer 26

in the real economy other variables change too

Question 27

Why does it matter that the supply and demand model extrapolates microeconomic info to look at goods and services that have large markets ?

Answer 27

more variables can lead to change

Question 28

Why does it matter that the supply and demand model tends to have asymmetric information ?

Answer 28

consumers don’t have full information regarding products leading to decision making that doesn’t maximise customer satisfaction

Question 29

What is the Fallacy of composition ?

Answer 29

when an economist infers that something is true for the whole economy from information derived from a part of the economy

Question 30

What is an example of the Fallacy of composition ?

Answer 30

extrapolating information on an individual market and applying it to the economy as a whole