Price Determination and Price Mechanism

Question 1

What is equilibrium price?

Answer 1

Equilibrium is a state in which market supply and demand balance each other

Question 2

What is equilibrium quantity?

Answer 2

Equilibrium quantity is when there is no shortage or surplus of a product in the market

Question 3

what is a shortage?

Answer 3

is a condition where the quantity of a product or service demanded is greater than the quantity supplied at the market price

Question 4

Referring to extension and contraction, explain how shortages are resolved

Answer 4

Firms know they can charge higher prices and still sell their goods, so this will cause an extension in supply and they will now charge P1 for quantity Q1. This higher price will lead to a contraction in demand. The prices are now in equilibrium.

Question 5

What is a surplus?

Answer 5

an amount that is more than is needed

Question 6

Referring to extension and contraction, explain how surpluses are resolved

Answer 6

Price falls, supply contracts and
demand expands

Question 7

Explain 3 functions of the
price mechanism

Answer 7

• allocating resources
• signalling changes in supply and demand
• providing incentives to producers and consumers