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1.2.6 Sheet 25 Market Equilibrium – Price mechanism
1. Missing words 7 marks
Market equilibrium occurs when _________________ equals _______________. At this point, economists can
ascertain the market ________________ and output level. If the price charged for a given good or service is above
the equilibrium price, then excess supply exists. This is known as a __________________. Firms will have unsold
stock, and in order to clear this stock, they will be forced to ________________ prices. If the price being charged
is too low (below equilibrium price), then a ___________________ exists (demand is greater than supply), and
price is likely to _____________________.
Missing words: surplus, demand, reduce, price, supply, rise, shortage
2. Complete the table below with the new equilibrium points (assuming point A is the initial
equilibrium). HINT: write in the table below which line(s) will shift e.g. Demand shifts in to D 1 etc.
Price
S1
S
S2
J
H
L
G
A
F
K
C
D2
B
D
Quantity
D1
Good/Service
Demand/supply factors
New (short-term) equilibrium
4 marks
Petrol
Surge in car ownership in UK
House prices
Higher interest rates & increase of immigration of building workers
Flights to USA
Lower oil prices and successful advertising by US tourist boards
Wine
Higher tax on alcohol and the publication of warnings regarding
alcohol consumption
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3. Data Response: Tourism - Mexico's latest flu victim
‘With 26 confirmed deaths from swine flu across the entire country, the primary victims of this malicious virus are a
tiny minority. But its secondary, economic casualties are everywhere. Pancho and his band hang around near the
historic centre of the capital. For years they, and generations of their predecessors, have been entertaining tourists
with raucous, nationalistic tunes. The curfew on this capital's economic activity is about to be lifted, but the foreign
visitors, with the money, are nowhere to be seen.
Walk into the crisp, modernist lobby of the Camino Real hotel in the upmarket district of Polanco, and you will be
treated as a bit of a novelty. Guests are far outnumbered by staff. The hotel has over 700 rooms. Less than 40 are
occupied. The World Health Organization is the only regular customer these days.’
Source: adapted from www.bbc.co.uk
Complete the diagram below, and explain what has happened to the value of the peso against the dollar.
Pesos per $
S
Pe
D
Qe
Quantity of Pesos
HINT: explain what will have happened to demand for holidays in Mexico, what does this mean has happened to
demand for the Mexican currency?
3 marks for the diagram and 4 for written explanation
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