Price determination
9 flashcards to master Price determination
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Define 'equilibrium' in the context of market price determination.
Equilibrium is the state where market supply and demand balance each other, and as a result prices become stable. At this point, there is no pressure for prices to rise or fall.
Explain the difference between 'equilibrium price' and 'equilibrium quantity'.
Equilibrium price is the price at which the quantity demanded equals the quantity supplied. Equilibrium quantity is the amount of a good or service bought and sold at the equilibrium price.
What does 'market clearing' mean in economics, and how does it relate to equilibrium?
Market clearing occurs when the market reaches equilibrium, meaning all goods supplied are purchased by consumers. There is no surplus or shortage, leading to an efficient allocation of resources.
Describe the condition that leads to a 'surplus' in the market.
A surplus occurs when the quantity supplied is greater than the quantity demanded. This usually happens when the price is above the equilibrium price, leading to excess inventory.
How does a 'shortage' arise in a market, and what is its effect on price?
A shortage arises when the quantity demanded exceeds the quantity supplied. This happens when the price is below the equilibrium price, putting upward pressure on prices as consumers compete for limited goods.
Explain 'excess supply' and its impact on market price.
Excess supply, also known as a surplus, is when the quantity supplied exceeds the quantity demanded, often due to a price being set too high. This forces producers to lower prices to sell their goods, moving the market towards equilibrium.
What is 'excess demand,' and how does it affect the market?
Excess demand, also known as a shortage, is when the quantity demanded exceeds the quantity supplied, typically because the price is too low. This situation puts upward pressure on prices as consumers compete for the limited available goods.
Illustrate, with an example, how a shift in the demand curve affects the equilibrium price and quantity.
If demand for coffee increases (curve shifts right), the equilibrium price and quantity of coffee will both increase. Consumers are willing to pay more and buy more coffee at each price point.
Illustrate, with an example, how a shift in the supply curve affects the equilibrium price and quantity.
If supply of gasoline increases (curve shifts right), the equilibrium price will decrease, and the equilibrium quantity will increase. This will lead to more gasoline being sold at a lower price
Key Questions: Price determination
Define 'equilibrium' in the context of market price determination.
Equilibrium is the state where market supply and demand balance each other, and as a result prices become stable. At this point, there is no pressure for prices to rise or fall.
What does 'market clearing' mean in economics, and how does it relate to equilibrium?
Market clearing occurs when the market reaches equilibrium, meaning all goods supplied are purchased by consumers. There is no surplus or shortage, leading to an efficient allocation of resources.
Describe the condition that leads to a 'surplus' in the market.
A surplus occurs when the quantity supplied is greater than the quantity demanded. This usually happens when the price is above the equilibrium price, leading to excess inventory.
How does a 'shortage' arise in a market, and what is its effect on price?
A shortage arises when the quantity demanded exceeds the quantity supplied. This happens when the price is below the equilibrium price, putting upward pressure on prices as consumers compete for limited goods.
Explain 'excess supply' and its impact on market price.
Excess supply, also known as a surplus, is when the quantity supplied exceeds the quantity demanded, often due to a price being set too high. This forces producers to lower prices to sell their goods, moving the market towards equilibrium.
About Price determination (2.5)
These 9 flashcards cover everything you need to know about Price determination for your Cambridge IGCSE Economics (0455) exam. Each card is designed based on the official syllabus requirements.
What You'll Learn
- 6 Definitions - Key terms and their precise meanings that examiners expect
- 1 Key Concepts - Core ideas and principles from the 0455 syllabus
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Continue Learning
After mastering Price determination, explore these related topics:
- 2.4 Supply - 9 flashcards
- 2.6 Price elasticity of demand - 10 flashcards
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