Download 25 Market Equilibrium 1. Ed

25. Market Equilibrium – Price mechanism
1. Missing words
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).
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
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
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
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25. ANSWERS: Market equilibrium – Price mechanism
1. Demand…supply…price…surplus…reduce…shortage…rise
2.
Good/Service
Demand/supply factors
New Equilibrium
Oil
Surge in car ownership in UK
L
House prices
Higher interest rates and increase of immigration of building workers
B
Flights to the USA
Lower oil prices and successful advertising by US tourist boards
F
Wine
Higher tax on alcohol and the publication of warnings regarding alcohol
consumption
G
3.
Pesos per $
S
Pe
P1
D
D1
Q1
Qe
Quantity of Pesos
Demand for holidays to Mexico will have fallen as a result of the risk of contracting swine flu. Demand for Mexican
currency, the peso, will fall, as fewer tourists travel to the country. This causes the demand curve to shift inwards,
and results in a lower value for the peso against the dollar. The peso can be said to have depreciated.
www.a-zbusinesstraining.com