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Chapter 9 IGCSE

The document discusses how market prices are determined by the equilibrium of supply and demand, where the equilibrium price is where the quantity demanded equals the quantity supplied. It explains how markets move from a state of disequilibrium, where demand and supply are not equal, back to the equilibrium price and quantity through the interaction of market forces that push prices up or down. Diagrams are used to illustrate how prices and quantities adjust when there is excess supply or excess demand.

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406 views22 pages

Chapter 9 IGCSE

The document discusses how market prices are determined by the equilibrium of supply and demand, where the equilibrium price is where the quantity demanded equals the quantity supplied. It explains how markets move from a state of disequilibrium, where demand and supply are not equal, back to the equilibrium price and quantity through the interaction of market forces that push prices up or down. Diagrams are used to illustrate how prices and quantities adjust when there is excess supply or excess demand.

Uploaded by

taj qaiser
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Chapter 9

Price determination
Learning objectives
•

By the end of this chapter you will be able to:


n use demand and supply schedules and curves to establish equilibrium prices and sales in a market
• use demand and supply schedules and curves to identify disequilibrium prices and excess demand and
supply in a market
Introducing the topic
9.1 How prices are determined
• Consumers want low prices, whilst sellers want high prices. So how is
the price of a product determined? In some cases, there is direct
bargaining between buyers and sellers. Buyers often haggle with
market traders, seeking to drive the price down and the traders aim
to keep the price relatively high. In other cases, the bargaining is more
indirect Firms estimate and then charge what they think is the
equilibrium price, that is the price where demand and supply are
equal.
9.1 How prices are determined
• If they find that 'they cannot sell all of their output at this price, they
will lower it If, on the other hand, they find that consumers want to
buy more than what they are offering for sale at this price, they will
raise the price. Equilibrium is a situation where supply curve and
demand curve intersect each other at intersecting point we have
equilibrium quantity and equilibrium price .
Market equilibrium
•
Equilibrium price
Equilibrium price is also sometimes referred to as the market clearing price. This is because it is the price
where demand and supply are equal, and so there are no shortages or surpluses of the product. The
equilibrium price of a product can be found by comparing the demand and supply schedules of that product,
and seeing where demand and supply are equal. Table 9.1 uses the information previously given on train
tickets in Chapters 7 and 8.
Table 9.1: The daily demand for and supply of train tickets from Station X to Station Y
Equilibrium price
• In this case the equilibrium price is $35, since at this point demand and supply are equal.
The equilibrium price can also be found by examining a demand and supply diagram. It occurs where the
demand and supply curves intersect.
• Figure 9.1 shows that the equilibrium price is P and the equilibrium quantity is Q. Prices will stay at P and
sales at Q until demand and supply conditions change.
Equilibrium price
Moving from market disequilibrium to Market equilibrium

• Market forces move price towards the equilibrium. If a firm sets the price above the equilibrium level, To it
will ensure not sell the all firm of sells the products all of the it products offers for it sale wants - there to, it
will will lower be a surplusprice until
market clears, with the quantity demanded equalling the quantity supplied. Figure 9.2
a market initially being in a state of disequilibrium with supply exceeding demand.
Supply Exceeding Demand
Moving from market disequilibrium to
Market equilibrium
• At $6, the firm is willing and able to sell 10 000 products, but consumers buy only 4000. This leaves 6000
unsold products. As a result price will fall, causing demand to extend and supply to contract until price
reaches the equilibrium level. Figure 9.3 shows this adjustment.
Fig 9.3 Return to Equilibrium
Excess Demand
• Market forces will also move the price, if it is initially set below the equilibrium
In this case, there will initially be a shortage of the product with demand exceeding i: the
h (excess demand) as shown in Figure 9.4.
Fig. 9.5: Return to equilibrium Quantity

• Some consumers anxious to buy the product will be willing to pay a higher price and suppliers recognising
this excess demand will raise the price. Figure 9.5 shows the price b pushed up to the equilibrium level of $5.
Answer
Multiple choice questions
•
1 Equilibrium price is the price at which:
• A Everything that is produced is sold
B The amount consumers demand is equal to the amount sellers supply
C The number of buyers equals the number of sellers
D Supply exceeds demand
Multiple choice questions
• 2 A market is experiencing a shortage. What will happen to price and
sales as the market moves back to equilibrium?
Price Sales
A Decrease fall
• B Decrease Rise
• C Increase Fall
• D Increase Rise
Multiple choice questions
If there is excess demand in a market, what is the relationship between price and equilibrium price, and sales and equilibrium sales?

Price Sales

A above equilibrium above equilibrium

B above equilibrium below equilibrium

C below equilibrium below equilibrium

D below equilibrium above equilibrium


Multiple choice questions
•
A market is operating with a disequilibrium price. What must this
mean?

A Demand and supply are not equal


B Shortages do not exist
C The price mechanism is not working
D There is no opportunity cost involved
Four-part question
•
a What may be the opportunity cost of buying apples
• b Explain why the market for apples may be why a surplus of apples be
• c Analyse, using a demand and supply diagram, eliminated. (6) fit from a market being in
• d Discuss whether or not consumers will bene disequilibrium. (8)
Flash Cards
• https://www.cram.com/flashcards/edexcel-igcse-economics-6104051
#google_vignette

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