Price mechanism

Question 1

excess demand and supply equilibrium

Answer 1

The supply and demand model tells us that price adjust due to the price mechanism which allows us to determine the price in the market

Prices lower to eliminate excess supply or surpluses as When the price is above the equilibrium price, the quantity supplied will exceed the quantity demanded leading to excess supply (or a surplus).

And prices rise to eliminate excess demand or shortages
But when it gets to equilibrium the price stops moving the price stays where it is
When the price is below the equilibrium price, the quantity demanded will exceed the quantity supplied, leading to excess demand (or a shortage).

Question 2

price mechanism

Answer 2

the interaction of supply and demand to determine prices aka invincible hand and there are three main functions
signalling incentivising and rationing

Question 3

price mechanism signalling

Answer 3

falling prices signals to producers that consumers want fewer goods therefore producers reduce the quantity of the good they supply

Question 4

price mechanism

Answer 4

falling prices reduces the incentive for producers to supply as less profit can be made therefore produce will reduce the quantity supplies

Question 5

so what are the two functions that target supply

Answer 5

when prices are higher than equilibrium this will cause excess supply leading to the signalling and incentive price function being used So production will decrease, leading to a contraction in supply. and reduce prices back to equilibrium point

Question 6

price mechanism rationing

Answer 6

as price rises there are fewer consumers willing and able to consume/demand goods at higher prices therefore this rations/limits the quantity demanded - decreasing the quantity demanded and taking us back to equilibrium

Question 7

summary of price mechanisms

Answer 7

signalling
higher prices signal to producers that consumers want more goods
lower process signal to producers that consumers want fewer goods

incentivising
higher prices means more profit, increasing incentive to sell more
Lower prices reduce profits, reducing incentive to sell

rationing
higher prices limit or ration the quantity demanded by consumers