topic 4 - theme 1

Question 1

what is market equilibrium?

Answer 1

where supply and demand are equal

Question 2

what is consumer surplus?

Answer 2

the value that consumers gain from consuming a good or service over and above the price paid

Question 3

what is producer surplus?

Answer 3

the difference between the price received by firms and the price they would have been willing to accept

Question 4

what are the four functions of the price mechanism?

Answer 4

• rationing
• incentive
• signalling
• allocate

Question 5

what is rationing?

Answer 5

where prices rise to ration-off excess demand; this means consumers will decrease the quantity demanded for this good

Question 6

what is incentive?

Answer 6

where prices motivate firms (consumers) to take action e.g. for firms to increase quantity supplied

Question 7

what is signalling?

Answer 7

where a price provides information (a signal) either for producers to consider whether to supply a good or for consumers to consider whether to purchase a good

Question 8

what is allocate?

Answer 8

price allocate scarce resources among competing uses

Question 9

what are rationing functions?

Answer 9

prices ration scarce resources when demand outstrips supply -> when there is a shortage, prices is bid up, leaving only those willing and able to pay to buy

Question 10

what are incentive functions?

Answer 10

through choices, consumers send information to producers about their changing nature of wants and needs

Question 11

what are signalling functions?

Answer 11

• if prices are rising due to high demand from consumers, this signals suppliers to expand production to meet higher demand