Price Mechanism

Question 1

Price mechanism definition

Answer 1

The interaction of supply and demand to determine prices

Question 2

An increase in price causes a ____________ in demand

Answer 2

Increase in price - Contraction in demand

Question 3

An increase in price causes a ____________ in supply

Answer 3

Increase in price - Extension in supply

Question 4

A fall in price causes a ______________ in demand

Answer 4

Fall in price - Extension in demand

Question 5

A fall in price causes a ____________ in supply

Answer 5

Fall in price - Contraction in supply

Question 6

Define: Excess supply

Answer 6

Quantity supplied is greater than quantity demanded

Question 7

Define: Excess demand

Answer 7

Quantity demanded is greater than quantity supplied

Question 8

What are the 3 functions of the price mechanism

Answer 8

Signalling
Incentivising
Rationing

Question 9

What is signalling

Answer 9

Higher price signal to producers that consumers want more goods
Lower prices signal to producers that consumers want fewer goods

Question 10

What is incentivising

Answer 10

Higher prices incentivise firms to supply/sell more, to maximise profit
Lower prices incentivise firms to supply/sell less, to avoid losing profit

Question 11

What is rationing

Answer 11

Higher prices ration the quantity demanded by consumer (rationing only takes place when the price increases)

Question 12

Increase in supply = _________ price, __________ quantity

Answer 12

Lower price

Higher quantity

Question 13

Decrease in supply = __________ price, _________ quantity

Answer 13

Higher price

Lower quantity