Price Determination

Question 1

How is Price Determined?

Answer 1

Price- determined- interaction- demand & supply- competitive market

Question 2

What is Equilibrium Price?

Answer 2

Equilibrium price- quantity demanded= quantity supplied- point of intersection (demand & supply curves)

Question 3

What is Excess Supply?

Answer 3

Excess supply- price of good ⬆️ than equilibrium price … quantity supplied ⬆️ quantity demanded (firms profit maximisers)

Question 4

What is Excess Demand?

Answer 4

Excess demand- price of good ⬇️ than equilibrium price … quantity demanded ⬆️ quantity supplied

Question 5

What is the Price Mechanism?

Answer 5

Price mechanism (Adam Smith called ‘invisible 🖐 of market’)- price is determined by supply & demand (i.e producers & consumers)- eliminates surpluses & shortages through contraction & expansion of supply & demand curves

Question 6

How does the Price Mechanism solve Excess Demand?

Answer 6

Excess demand (initial price ⬇️)- consumers bid up price (obtaining good)-> encouraged firms produce ⬆️ (profit maximisers) … supply extends & demand contracts until equilibrium price reached

Question 7

How does the Price Mechanism solve Excess Supply?

Answer 7

Excess supply (initial price ⬆️)- consumers struggle to afford good-> ⬇️ demand … price ⬇️- firms discouraged to produce ⬆️-> supply contracts, demand extends until equilibrium price reached