Alevel Economics OCR 2.5 The Interactions of markets

check the diagrams in the booklet

what is the definition of a free market?

any place where buyers meet suppliers to exchange goods and service free from government intervention

where does equilibrium occur?

where demand equals supply

what does equilibrium cause?

where the market is clear of excess supply and excess demand

where does disequilibrium occur?

when demand doesn’t equal supply

what do we call price and quantity when equilibrium is occuring?

market clearing price and market clearing quantity

what did Adam Smith say that equilibrium in a free market represent?

allocative efficiency

why did he say this?

the resources firms are using to make goods and services are perfectly following consumer demand (the resources allocated to supply are equal to demand)

what is another word for free market?

the price mechanism

what does this mean?

that prices in a market have special functions that can return the market to equilibrium

what is the neumonic to remember the special forces prices have?

ARSI

what does A stand for?

A→ allocate scare resources efficiently

what does R stand for?

ration scare resources by encouraging or discouraging consumption

what does S stand for?

signal excess demand/supply and need for more or less resources

what does I stand for?

incentivise producers to increase or decrease output to increase profit

what does ARSI represent?

the 4 price mechanisms that prices have to return the market to equilibrium