2281 · 2.5
Price determination flashcards
Revision flashcards for Cambridge 2281 Price determination (syllabus 2.5). Flip, recall, then mark a real past-paper question.
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What happens when price is above equilibrium?
Excess supply (surplus) — Qs > Qd — puts downward pressure on price until equilibrium is restored.
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What happens when price is below equilibrium?
Excess demand (shortage) — Qd > Qs — puts upward pressure on price.
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If demand and supply both increase, what happens to Q?
Quantity definitely rises — equilibrium Q is unambiguously higher.
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If demand and supply both increase, what happens to P?
Ambiguous — depends on relative magnitudes of shifts; state 'depends on magnitude' in exams.
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What is the price mechanism?
Rationing, signalling, and incentivising — prices adjust to eliminate surpluses and shortages.
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How do you analyse simultaneous curve shifts?
Shift one curve at a time on a diagram; compare original and new equilibrium; note ambiguous outcomes.
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What is market disequilibrium?
A situation where quantity demanded does not equal quantity supplied at the current market price, resulting in either an excess supply (surplus) or an excess demand (shortage).
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What are the three functions of the price mechanism?
1. Signalling function (prices signal information to producers and consumers). 2. Incentive function (prices motivate economic agents to change their behaviour). 3. Rationing function (prices allocate scarce resources).
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What is the outcome when both demand and supply increase simultaneously?
The equilibrium quantity will definitely increase. The effect on the equilibrium price is indeterminate; it depends on the relative magnitude of the shifts in demand and supply.
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Define 'excess demand'.
Also known as a shortage, it occurs when the quantity demanded for a good or service exceeds the quantity supplied at a given price. This happens when the price is below the equilibrium level.
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What is the outcome when demand decreases and supply increases simultaneously?
The equilibrium price will definitely fall. The effect on the equilibrium quantity is indeterminate; it depends on the relative magnitude of the shifts in demand and supply.