2.5 Price determination

Equilibrium price is

• The price at which there is no tendency to change because planned (or desired or ex ante) purchases (i.e. demand) are equal to planned sales (i.e. supply).

• Where demand is greater than supply

• Where supply is greater than demand

• The price at which there is neither excess demand nor excess supply but where everything offered for sale is purchased

Excess demand is

• Where demand is greater than supply.

• Where supply is greater than demand.

• Where there is a shortage

• Where there is a surplus

Excess supply is

• Where demand is greater than supply.

• Where supply is greater than demand.

• Where there is a shortage

• Where there is a surplus

Free Market forces are

• supply

• demand

• demand and supply

Disequilibrium price is

• The price at which there is no tendency to change because planned (or desired or ex ante) purchases (i.e. demand) are not equal to planned sales (i.e. supply).

• Where demand is greater than supply

• Where supply is greater than demand

• The price at which there is either excess demand or excess supply, where everything offered for sale is not purchased

In supply the long run is

• the period of time when all factor inputs can be varied but the state of technology remains constant.

• the period of time when at least one factor input to the production process can be varied.

In supply the short run is

• the period of time when all factor inputs can be varied but the state of technology remains constant.

• the period of time when at least one factor input to the production process can be varied.

Which of the following describe the function (the role of) prices in a market?

• Incentive function, When changes in price encourage buyers and sellers to change the quantity they buy and sell. A rise in price encourages buyers to purchase less and sellers to produce more; and vice versa.

• Rationing function, When changes in price lead to more or less being produced, so increasing or limiting the quantity demanded by buyers.

• Signalling function, When changes in price give information to buyers and sellers which influence their decisions to buy and sell.

A demand curve is drawn on the assumption that

• quantity demanded always increases as price falls.

• changes in price do not influence supply.

• price elasticity of demand does not vary along the demand curve.

• factors affecting demand, other than price, remain constant.

The cross elasticity of demand between goods X and Y is positive. This implies that they are

• normal goods

• substitute goods.

• goods in composite demand.

• complementary goods.