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2.4 Price Determination

IGCSE Economics Notes / Price Determination

 

2.4.1 Price Mechanism

Summary Fill in the Blanks

Click the blanks to reveal the key answers.

1Definition of the Price Mechanism

The price mechanism is where the forces of
_______demand
and
_______supply
determine prices.
Prices act as
_______signals
, incentives and a
_______rationing
device.

2Role of the Price Mechanism

It allocates
_______scarce
resources through demand and supply.
It guides decisions of
_______consumers
and
_______producers
.
Prices adjust to move markets toward
_______equilibrium
.

3Basic Resource Allocation Decisions

(1) What to produce depends on
_______demand
.
Higher demand usually leads to higher
_______prices
.
Higher prices encourage firms to produce
_______more
.
(2) How to produce depends on relative
_______costs
.
Firms aim to minimise
_______costs
and maximise profit.
(3) For whom to produce depends on
_______income
and ability to pay.
Consumers with higher
_______incomes
can buy more goods.

4Advantages of the Price Mechanism

It promotes efficient
_______allocation
of resources.
It responds quickly to changes in
_______demand
and supply.
It encourages
_______innovation
and efficiency.
It provides incentives for
_______producers
.

5Limitations of the Price Mechanism

It may lead to
_______inequality
.
Public goods may be
_______underprovided
.
Externalities may cause
_______market failure
.
Merit goods may be
_______under-consumed
.

Exam Summary

Price mechanism = interaction of demand and supply.

What to produce? Price signals demand.

How to produce? Cost efficiency.

For whom to produce? Income and purchasing power.

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2.4.2 Market Equilibrium

Summary Fill in the Blanks

Click the highlighted blanks to reveal key ideas about market equilibrium. Headings are retained and the blanks are designed for IGCSE level.

1Definition of Market Equilibrium

Market equilibrium occurs when quantity
________________ demanded
equals quantity
________________ supplied
.
At equilibrium there is no
________________ shortage
and no
________________ surplus
.
Equilibrium determines the equilibrium
________________ price
and equilibrium
________________ quantity
.

2Interpretation of Equilibrium Using Demand and Supply Schedules

A demand and supply schedule shows quantities demanded and supplied at different
________________ prices
.
Equilibrium occurs where quantity demanded
________________ equals
quantity supplied.
If price is above equilibrium, quantity supplied is
________________ greater
than quantity demanded.
This creates a
________________ surplus
and price tends to
________________ fall
.
If price is below equilibrium, quantity demanded is
________________ greater
than quantity supplied.
This creates a
________________ shortage
and price tends to
________________ rise
.

3Drawing and Interpretation of Equilibrium Using Demand and Supply Curves

The vertical axis represents
________________ price
and the horizontal axis represents
________________ quantity
.
The demand curve slopes
________________ downward
.
The supply curve slopes
________________ upward
.
Equilibrium occurs where the demand and supply curves
________________ intersect
.
Changes in demand or supply create a
________________ new
equilibrium price and quantity.

4Economic Explanation

If more people increase demand for goods such as toothpaste, overall
________________ demand
rises.
Higher demand pushes
________________ prices
upward.
Firms respond by supplying
________________ more
.
The market then reaches a
________________ new
equilibrium.

5Exam Summary

Equilibrium occurs where
________________ demand equals supply
.
An increase in demand leads to
________________ higher price and higher quantity
.
A decrease in demand leads to
________________ lower price and lower quantity
.
An increase in supply leads to
________________ lower price and higher quantity
.
A decrease in supply leads to
________________ higher price and lower quantity
.

You need to know:

(a) Market equilibrium occurs when quantity demanded equals quantity supplied.

(b) At equilibrium there is no shortage and no surplus.

(c) If price is above equilibrium, surplus exists and price tends to fall.

(d) If price is below equilibrium, shortage exists and price tends to rise.

(e) Equilibrium is shown at the intersection of the demand and supply curves.

(f) Changes in demand or supply create a new equilibrium price and quantity.

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2.4.3 Market Disequilibrium

Summary Fill in the Blanks

Click the highlighted blanks to reveal key ideas about market disequilibrium. Headings are retained and the blanks are designed for IGCSE level.

1 Definition of Market Disequilibrium

Market disequilibrium occurs when quantity demanded does not
________________ equal
quantity supplied.
The market is not in
________________ balance
and there is either a surplus or a shortage.

2 Interpretation of Disequilibrium Using Demand and Supply Schedules

Surplus (Supply Exceeds Demand)
A surplus occurs when quantity
________________ supplied
is greater than quantity demanded.
This means some goods remain
________________ unsold
in the market.
Sellers reduce
________________ price
to attract buyers.
As a result, price
________________ falls
or is driven down.
Quantity traded
________________ increases
as price moves toward equilibrium.
Shortage (Demand Exceeds Supply)
A shortage occurs when quantity
________________ demanded
is greater than quantity supplied.
This means there are
________________ insufficient
goods available in the market.
Buyers
________________ compete
to purchase goods.
As a result, price
________________ rises
or is driven up.
Quantity traded
________________ increases
as price moves toward equilibrium.

3 Disequilibrium Adjustment Process

The price mechanism restores
________________ equilibrium
through price signals and incentives.
Surplus Adjustment
Excess supply causes price to
________________ fall
.
________________ Demand
increases and supply decreases until equilibrium is restored.
Shortage Adjustment
Excess demand causes price to
________________ rise
.
________________ Demand
decreases and supply increases until equilibrium is restored.

4 Exam Summary

When supply exceeds demand, there is a
________________ surplus
.
A surplus causes price to
________________ fall
and quantity traded to rise.
When demand exceeds supply, there is a
________________ shortage
.
A shortage causes price to
________________ rise
and quantity traded to rise.
Market forces push price toward
________________ equilibrium
.

You need to know:

(a) Market disequilibrium occurs when quantity demanded does not equal quantity supplied.

(b) Disequilibrium creates either a surplus or a shortage.

(c) A surplus causes price to fall, while a shortage causes price to rise.

(d) The price mechanism helps restore equilibrium through price changes.

(e) Market forces move price and quantity traded back toward equilibrium.

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