The determination of equilibrium market prices

Question 1

What is the equilibrium price and quantity

Answer 1

This is when demand and supply meet

Question 2

At equilibrium, what is the price called and what does this price indicate

Answer 2

At equilibrium the price is called The market clearing price.
- this indicates the price at which sellers are selling their stock at an acceptable rate

Question 3

What is disequilibrium and when does this occur

Answer 3

Disequilibrium is when demand is not equal to supply.
- Disequilibrium occurs whenever there is excess demand or excess supply in a market

Question 4

Define excess demand and when does excess demand occur

Answer 4

Excess demand is when the demand is greater than the supply
- occur when prices are too low or when demand is so high that supply cannot keep up with it

Question 5

Why does excess demand lead to changes in price

Answer 5

Producers are selling quickly at a low price and not all buyers that are willing and able to buy are able to purchase the product.
- producers realise they can increase prices and generate more revenue and profits and so raise the price
- This causes a contraction in QD as some buyers no longer desire the good/service at a higher price
- This causes an extension in QS as other sellers are more incentivised to supply at higher prices
- price will increase until the market will have cleared the excess demand and we are at equilibrium price and quantity

Question 6

State another word for excess demand

Answer 6

Shortage

Question 7

Define excess supply and state when excess supply occurs

Answer 7

Excess supply is when the supply is greater than the demand
- occur when prices are too high or when demand falls unexpectedly

Question 8

State another word for excess supply

Answer 8

Surplus

Question 9

Why does excess supply lead to changes in price

Answer 9

• Producers realise they are not selling and that the price are too high.
• Some buyers want to purchase the G/S but are not willing to pay the high price.
• to eliminate excess supply, producers will lower prices, which will
  encourage consumers to buy their goods, generating revenue
• This causes a contraction in QS as some sellers no longer desire to supply at lower price
• This causes an extension in QD as buyers are more willing to purchase at lower prices
• When Qs is equal to Qd we are at equilibrium, the market will have cleared the excess supply

Question 10

On the demand and supply curve, what happens to the quantity supplied and quantity demanded as price increases

Answer 10

As price goes up, we see a contraction in demand (QD decreases because goods are more expensive) and an extension in supply (Qs increases because higher prices mean more profit for producers)

Question 11

On the demand and supply curve, what happens to the quantity supplied and quantity demanded as price decreases

Answer 11

when the price goes down, we see a contraction in supply (Qs decreases because a there is less incentive to supply at lower prices) and an extension in demand (Qd increases along our demand curve because goods are cheaper)