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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 Page | 1 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 Page | 2