How prices are determined - equillibrium price

Market Equillibrium

Where demand equals supply. (a point where the market is free of excess of demand and excess of supply)

Market Disequillibrium

Where there is more or less of supply than there is demand for a good or service

Price Mechanism

A way of controlling the free market. Eg. when goods/services aren’t selling, prices can be reduced - this increases demand or when there is a greater demand, prices are raised.

Signal / signalling

A sign that the price needs to be changed (if the supplier has excess stock / if demand is so high that queues start to form)

Incentive

Producers can be incentivised by the profit motive. Customers can be incentivised by competitive pricing

Worth

How much you value something, price isn’t an accurate measure of worth.

Why isn’t price an accurate measure of worth?

We might all be prepared to pay different prices for a product, or we might be willing to pay a different price for the same good / service in a different situation

How can competing needs and wants be controlled?

• Price can be raised when goods / services are scarce

• Price can be lowered when goods / services are in abundance