Topic 4 - Price Determination

Question 1

Market equilibrium

Answer 1

A situation that occurs when the quantity demanded is equal to quantity supplied

Question 2

Comparative static analysis

Answer 2

Examines the effect on equilibrium of a change in the external conditions affecting a market - either a condition of demand, supply or both.

Question 3

Consumer surplus

Answer 3

The difference between how much consumers are prepared to pay for a product and what they actually pay (market price). The consumer surplus can be represented by the area below the demand curve and above the equilibrium price.

Question 4

Producer surplus

Answer 4

The difference between how much producers are prepared to accept for a product and what they actually receive (market price). Producer surplus can be represented by the area above the supply curve and below the equilibrium price.

Question 5

3 price mechanisms

Answer 5

Acts as an incentive to firms
Acts as a signaling device
Acts as a rationing device