Podcast
Questions and Answers
What does the price mechanism primarily rely on to determine prices?
What does the price mechanism primarily rely on to determine prices?
The equilibrium price is where quantity demanded is greater than quantity supplied.
The equilibrium price is where quantity demanded is greater than quantity supplied.
False
Define consumer surplus.
Define consumer surplus.
Consumer surplus is the benefit consumers receive when they pay less than what they were willing to pay.
The benefit producers receive when they sell at a price higher than they were willing to sell is called __________.
The benefit producers receive when they sell at a price higher than they were willing to sell is called __________.
Signup and view all the answers
Which function of the price mechanism signals suppliers to increase production?
Which function of the price mechanism signals suppliers to increase production?
Signup and view all the answers
Match the following terms to their correct descriptions:
Match the following terms to their correct descriptions:
Signup and view all the answers
Prices rise and fall to reflect __________ and __________.
Prices rise and fall to reflect __________ and __________.
Signup and view all the answers
Excess demand occurs when the price is above the equilibrium price.
Excess demand occurs when the price is above the equilibrium price.
Signup and view all the answers
Study Notes
Price Mechanism, Equilibrium Price, Consumer and Producer Surplus
- Price Mechanism: A system where demand and supply forces determine commodity prices and their changes. Buyers and sellers set the price.
Functions of the Price Mechanism
- Signaling Function: Rising prices signal increased demand, prompting suppliers to increase production. Falling prices signal excess supply, encouraging price reductions.
- Incentive Function: Higher prices incentivize suppliers to produce more due to higher profits.
- Rationing Function: When demand surpasses supply, prices rise, rationing the good to those willing and able to pay.
- Allocation Function: Prices adjust to reflect scarcities and surpluses, directing resources to where they're needed.
Equilibrium Price
- Definition: The price at which quantity demanded equals quantity supplied.
Disequilibrium Price
- Definition: Occurs when quantity demanded is not equal to quantity supplied. This leads to either excess demand or excess supply.
Excess Supply
- Definition: When quantity supplied exceeds quantity demanded at a given price.
- Result: Firms reduce prices to increase demand.
Excess Demand
- Definition: When quantity demanded exceeds quantity supplied at a given price.
- Result: Firms increase prices due to shortage.
Consumer Surplus
- Definition: The benefit consumers receive when paying a price less than their maximum willingness to pay.
- Calculation: The difference between the maximum price a consumer is willing to pay and the actual price paid.
Producer Surplus
- Definition: Producers' benefit from receiving a price higher than their minimum acceptable selling price.
- Calculation: The difference between the actual price received and the minimum price a producer is willing to sell for.
Community Surplus
- Definition: The total benefit to society from a transaction. It is the sum of consumer and producer surplus.
- Conditions for Efficiency: Community surplus is maximized when markets reach equilibrium with no external influences/effects.
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
Related Documents
Description
This quiz explores the concepts of price mechanism, equilibrium price, and the various functions of price in economics. Understand how consumer and producer surplus are affected by changes in price through signaling, incentive, rationing, and allocation functions. Test your knowledge on these fundamental economic principles.
