1.2.6 Price determination

What is market equilibrium?

When demand = supply

What is market equilibrium also known as?

Allocative efficiency

What does ARSI stand for?

A- Allocate resources efficiently

R- Ration scarce resourced by encouraging/discouraging consumption

S-Signals in the market that there is excess/shortage of demand or supply so need to increase or decrease resources

I- Incetivises firms to increase or decrease prices to maximise profits

What is a Free Market?

A Free Market is any place where buyers meet suppliers to exchange g/s, free from government intervention.

What happens to prices in the market when there is excess demand?

Prices RISEEEE

What does the graph look like for excess demand?

What happens to demand when prices fall (excess demand)?

Demand will decrease (contract)

What will happen to supply when prices fall (excess demand)?

Supply will increase

What happens in the free market to fix the excess demand?

S- signal in market there is excess demand due to price falls

I- Incentivise firms to increase prices back to p*

R- Ration of scarce resources and so discourage quantity demanded

A- Resources have now been allocated efficiently

What happens to prices when there is excess supply?

Prices FALLLLL

What does the graph for excess supply look like?

What happens to demand (excess supply)?

Demand will increase

What happens to supply (excess supply)?

Supply will decrease

What does the market do to bring itself back into equilibrium?

SIRA

What does excess demand look like due to a demand shift to the right?

What does excess supply look like due to a supply shift to the right?

What are the 3 different markets the price mechanism works in?

Local markets

National Markets

Global Markets

How does the price mechanism work