THEME 1 - Topic 4 - Price determination

Question 1

Define market equilibrium

Answer 1

A situation that occurs when the price is such that the quantity consumers wish to buy is exactly equal to the quantity firms wish to supply.

Question 2

Define comparative static analysis

Answer 2

Examines the effect on equilibrium of a change in the external conditions affecting a market (determinants of demand/supply).

Question 3

Define excess supply

Answer 3

Occurs when the quantity demanded of a good/service is less than the quantity supplied by firms. A glut is present, and a price fall will occur.

Question 4

Define excess demand

Answer 4

Occurs when the quantity demanded of a good/service is greater than the quantity supplied by firms. A shortage is present, and a price rise will occur.

Question 5

Define consumer surplus

Answer 5

Is the difference between how much consumers are prepared to pay for a product and what they actually pay (market price), and is indicated by the area below the demand curve and above the price line.

Question 6

Define producer surplus

Answer 6

Is the difference between how much producers are prepared to accept for a product and what they actually receive, and is indicated by the area above the supply curve and below the price line.

Question 7

Define net welfare

Answer 7

Is a combination of producer surplus and consumer surplus, and is maximised at equilibrium

Question 8

What are the 6 sentences to describe a demand and supply diagram, if demand increases?

Answer 8

The original equilibrium is at E/ Following an increase in demand, the demand curve shifts rightwards from D to D1. Subesquently, the price rises from p to p1. Also, the quantity demanded and supplied of good rises from q to q1. There has been a contraction in supply. The new equilibrium is at E1.