Market equilibrium and disequilibrium

Question 1

What is the free market ?

Answer 1

Any place where buyers meet sellers / suppliers to exchange goods and services free from government intervention

Question 2

What are the 4 functions of price ( price mechanism )

Answer 2

Allocation
Rationing
Signalling
Incentivisation

Question 3

What does allocation mean in the price mechanism ?

Answer 3

Prices allocate scarce resources efficiently

Question 4

What does rationing mean in the price mechanism ?

Answer 4

Prices ration scarce resources by encouraging and discouraging consumption

Question 5

What does signalling mean in the price mechanism ?

Answer 5

Prices signal excess supply or demand and the need to increase or decrease resources

Question 6

What does incentivisation mean in the price mechanism ?

Answer 6

Prices incentivise producers to increase or decrease output in order to increase profits

Question 7

Draw out the shortage Diagram

Question 8

Draw out the excess supply Diagram

Question 9

What is equilibrium ?

Answer 9

When demand = supply ( allocative efficiency )