Section A: Key terms and recall
Define the term 'price mechanism'. [2 marks]
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The price mechanism is the system by which prices are determined in a market through the interaction of demand and supply. [2 marks]
What is meant by 'market equilibrium'? [2 marks]
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Market equilibrium is the point at which the quantity demanded equals the quantity supplied, resulting in a stable market price. [2 marks]
Explain the term 'disequilibrium' in the context of a market. [2 marks]
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Disequilibrium occurs when the quantity demanded does not equal the quantity supplied, leading to either a surplus or a shortage in the market. [2 marks]
Name two factors that can cause a shift in demand. [2 marks]
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Two factors that can cause a shift in demand are: 1. Changes in consumer income. 2. Changes in consumer tastes and preferences. [2 marks]
Name two factors that can cause a shift in supply. [2 marks]
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Two factors that can cause a shift in supply are: 1. Changes in the cost of production. 2. Changes in technology. [2 marks]
Section B: Applying your knowledge
In a local market, the equilibrium price of apples is £1.50 per kilogram. If the government imposes a price ceiling of £1.00 per kilogram, what is likely to happen? Explain your answer. [3 marks]
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A price ceiling of £1.00 per kilogram, which is below the equilibrium price, will likely create a shortage of apples. At the lower price, consumers will demand more apples, while producers will be less willing to supply them, leading to a market disequilibrium. [3 marks]
A new coffee shop opens in a town, increasing the supply of coffee. How will this affect the market equilibrium price and quantity of coffee? [3 marks]
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The increase in supply of coffee will shift the supply curve to the right. This will lead to a new market equilibrium with a lower price and a higher quantity of coffee sold. [3 marks]
During the winter months, the demand for umbrellas decreases. How will this affect the market equilibrium price and quantity of umbrellas? [3 marks]
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The decrease in demand for umbrellas will shift the demand curve to the left. This will lead to a new market equilibrium with a lower price and a lower quantity of umbrellas sold. [3 marks]
A popular smartphone becomes widely available in the market. How will this affect the market equilibrium price and quantity of smartphones? [3 marks]
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The increased availability of the smartphone will increase supply, shifting the supply curve to the right. This will lead to a new market equilibrium with a lower price and a higher quantity of smartphones sold. [3 marks]
Section C: Explain and analyse
Explain how the price mechanism works to achieve market equilibrium. Use a diagram to illustrate your answer. [4 marks]
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The price mechanism works through the interaction of demand and supply. When there is a shortage, the price tends to rise, encouraging producers to supply more and consumers to demand less. When there is a surplus, the price tends to fall, encouraging producers to supply less and consumers to demand more. This process continues until the market reaches equilibrium, where the quantity demanded equals the quantity supplied. A diagram of a demand and supply curve intersecting at the equilibrium point can illustrate this. [4 marks]
Analyse the effects of a price floor set above the equilibrium price in the market for milk. [5 marks]
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A price floor set above the equilibrium price in the market for milk will create a surplus. At the higher price, consumers will demand less milk, while producers will be willing to supply more. This surplus can lead to government intervention, such as buying and storing the excess milk or providing subsidies to farmers. The surplus can also lead to waste or lower quality products if the government does not intervene. [5 marks]
Explain the concept of market disequilibrium and provide an example of a situation that could cause it. [4 marks]
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Market disequilibrium occurs when the quantity demanded does not equal the quantity supplied, leading to either a surplus or a shortage. An example of a situation that could cause market disequilibrium is a sudden increase in the cost of production for a good. This would shift the supply curve to the left, leading to a higher equilibrium price and a lower quantity sold. If the price does not adjust quickly enough, there could be a shortage in the market. [4 marks]
Section D: Challenge
Consider a market where the demand and supply curves are given by the following equations:
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To find the equilibrium price and quantity, set Qd equal to Qs and solve for P: 100 - 2P = 30 + 3P 70 = 5P P = 14 Now, substitute P back into either the demand or supply equation to find the equilibrium quantity: Qd = 100 - 2(14) = 72 Qs = 30 + 3(14) = 72 The equilibrium price is £14, and the equilibrium quantity is 72 units. [6 marks]