Price Mechanism

Question 1

Market equilibrium (market clearing price)

Answer 1

Where D = S

Question 2

Why will disequilibrium not persist in a free market

Answer 2

Due to the price mechanism functions

Question 3

How is excess supply taken away by the price mechanism - ARSI

Answer 3

• signal provided to supplier that price is too high as stock is not being cleared
• incentive for firms to reduce price in order to make more profit
• price decreased to equilibrium point, where excess supply is rationed off in the long run
• scarce resources are allocated efficiently

Question 4

How does price mechanism eliminate excess demand

Answer 4

• signal that firms are maximising revenue as there is such high demand
• incentive to increase prices and therefore improve profits
• price moved up to p1, and excess demand rationed off

Question 5

Price mechanism locally:

Answer 5

Local - coronavirus = shift in good prices, rationing in L play as demand went up so prices went up, like toilet paper.

Question 6

Price mechanism nationally:

Answer 6

National - housing prices in london, as demand went up so price went up.

Question 7

Price mechanism globally:

Answer 7

1973 opec embargo during the Yom Kippur war, where opec placed a ban on oil exports to countries which supported Israel during the war like USA and UK, so supply severely fell for this necessity good, so there was excess demand for the alternate suppliers and therefore oil prices quadrupled