1.3.3 Price determination Flashcards
What is the equilibrium point ?
The point where demand and supply meet.
This is where quantity demanded is the same as quantity supplied.
What does the interaction of demand and supply determine?
The prices and quantities of the economy’s goods and services
In market economies prices are the signals that do what?
guide the allocation of resources.
Price indicates what to suppliers?
When consumers want more or less of their product
What causes excess demand and what does this say about the price?
When quantity demanded is higher than quantity supplied.
The price is too low for the market to clear.
What causes excess supply and what does this mean about the price?
When the quantity supplied is greater than the quantity demanded.
The price is too high for the market to clear.
market forces operate to restore what?
Equilibrium
Explain excess demand and what impact does it have?
Some customers who cannot get the goods they want to buy at the original price (below equilibrium) will be having to pay more for the product. Therefore suppliers can increase the price closer to the equilibrium level.
However, some customers will be put off by the rise in price.
Explain excess supply and what impact does it have?
The immediate impact is a surplus of the good. The price is above the equilibrium point which means it is too high to attract customers to buy all of the quantity being supplied. Some suppliers at this point will reduce their price so they can attract more sales.
What are the limitations of the supply and demand model and its predictions?
- It is a simplified model of events that can be complicated
- It is based on simplified assumptions about how markets work and assumes businesses and individuals have full information which is unrealistic
- Relies on ceteris paribus (meaning all other things are equal)
