Price determination, equilibrium, disequilibrium, excess demand/supply, the price mechanism Flashcards
Define the market.
Any place where buyers meet suppliers to exchange goods/services.
Define Equilibrium.
When demand=supply.
Define Disequilibrium.
When demand does not equal supply.
What are the functions of the Price Mechanism?
SIRA: Signals that price is too high/low Incentives to change price and increase profit Rations excess demand/supply Allocates scarce resources
When, on a diagram, is there excess supply?
Above the equilibrium.
When, on a diagram, is there excess demand?
Below the equilibrium.
Excess supply will cause prices to…
fall - as price falls producers are less willing to supply the good, thereby decreasing output.
Excess demand will cause prices to…
rise - as price rises producers are more willing to supply the good, thereby increasing output.
Define the Price Mechanism.
The price mechanism is the means by which decisions of consumers and businesses interact to determine the allocation of resources.
