UNIT EIGHT

Market Equilibrium
The Functions of the Price System
in a Market Economy

1. Adjust (to ) v – to make slight changes in something to make it fit or function better –
виправляти, коригувати, приводити у відповідність, регулювати, узгоджувати. To adjust to
prices – приводити у відповідності з цінами.
2. Assumption n. - something supposed but not proved – припущення, допущення. Syn.
supposition.
3. Attain v. – to succeed in doing or getting something – досягати, добиватися. To attain/
achieve/gain/reach one’s ambition/end/goal/purpose – досягати мети, to attain a price –
досягати ціни, to attain equilibrium – досягати рівноваги. Syn. to achieve, to reach.
4. Balance v. – to establish equal or appropriate proportions of elements – бути/знаходитись у
рівновазі, збалансовувати. To balance out – приводити до рівноваги. Syn. to be in/at(in)
equilibrium.
5. Do without v. – to manage in spite of not having something – обходитись без. To do without
any help – обходитися без сторонньої допомоги. Syn. to manage without.
6. Empty-handed adj. – having failed to obtain what was asked for – з порожніми руками. To go
empty-handed – залишатися/йти без покупок.
7. Equal v. - to be or become equal to – дорівнювати, відповідати. Syn. to be equal (to), to
match.
8. Excess n. – the amount or degree by which one thing or quantity exceeds another – надлишок,
надмір, перевищення, надмірність. Excess demand – надмірний/надлишковий/попит,
надлишок попиту, excess quantity – надмірна/надлишкова кількість, надлишок кількості,
excess quantity demanded – перебільшення величини попиту/ дефіцит/нестача, excess
quantity supplied – перебільшення величини пропозиції/надлишок, excess supply –
надмірна/надлишкова пропозиція, надлишок пропозиції, excess profit – надприбуток.
9. On an/the average – taking an amount or figure that represents the result of adding several
quantities together and dividing the total by the number of quantities – у середньому. Syn. at an/the
average.
10. Ration v. – to distribute relatively scarce resources from among competitive users when demand
exceeds supply – нормувати, розподіляти, to ration scarce resources –
розподіляти/нормувати обмежені ресурси. Syn. to allocate, to distribute.

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As you remember market economy is an economic system in which economic decisions and
the pricing of goods and services are guided by the interactions of a country's citizens and
businesses and there is little government intervention or central planning. Prices are the key
ingredients in a market economy because they make things happen. If buyers want to own

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some items badly, they will pay more for them. When sellers want to sell some items badly,
they will lower their prices. Prices play such an important role in economic life that most
democracies are often described as price-directed market economies.
The price system lies at the heart of any society. The price system is an economic system
where prices are not set by government but by the interaction of supply and demand. Under
such a system every commodity and every service has a price, i.e. the amount of money for
which a unit of goods or services is sold and bought.
Price for a commodity is a reflection of supply of and demand for this commodity. The
theory of supply and demand is the step toward understanding how market prices are
determined and the way in which these prices help make production and consumption
decisions - the decisions that make up not only the structure, but also the flesh and blood of
the economic system*.
The concepts of supply and demand have been introduced separately but it is time to put the
two concepts together. In economic theory, the interaction of supply and demand is known as
equilibrium.
One of the functions of markets is to find equilibrium prices that balance the supply of and
demand for goods and services. An equilibrium price (also known as a market price) is one
at which each producer can sell all he wants to produce and each consumer can buy all he
demands. Naturally, producers always would like to charge higher prices. But even if they
have no competitors, they are limited by the law of demand: if producers insist on a higher
price, consumers will buy fewer units. The law of supply puts a similar limit on consumers.
They always prefer to pay a lower price than the current one. But if they insist on paying less
suppliers will produce less and some consumers will go home empty handed.
In economics, economic equilibrium often refers to an equilibrium in a market that is the case
where a market for a product has attained the price where the quantity supplied of a certain
product exactly equals the quantity demanded. Thus, market clearing refers to an assumption
that markets always go to where the quantity supplied is equal to the quantity demanded.
At prices above the equilibrium price, the quantity supplied exceeds the quantity demanded,
so a surplus or excess supply develops.
What process occurs to bring the market back into equilibrium? Simple, the market price
adjusts. When the quantity supplied by firms is greater than the quantity demanded by
consumers there is more being produced than is being consumed. Unsold products start to
accumulate. Firms respond by lowering prices to stimulate demand. Lower prices also means
that firms will begin to produce less. In response to the lower prices the quantity demanded

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increases. This price response continues and the quantity supplied declines while the quantity
demanded increases until the equilibrium is restored.
At prices below the equilibrium price, the quantity demanded is greater than the quantity
supplied, and a shortage or excess demand develops.
It should be noted that a shortage is not the same thing as scarcity. Scarcity is an inevitable
consequence of limited resources and unlimited wants. Scarcity cannot be eliminated.
Shortage, however, can be eliminated by allowing prices to rise to the equilibrium level.
Sellers see the goods and services are quickly bought up and realize they could have asked a
higher price. The price goes up until the shortage disappears. The price continues to adjust
until the quantities demanded and the quantities supplied are equal. When the quantity
supplied is less than the quantity demanded the opposite happens. The increased quantity
demanded is a signal to firms to raise prices. With higher prices the quantity demanded
declines and firms are motivated by the higher prices to produce more, which returns the
market to equilibrium.
A decrease in demand leads to a decrease in both the equilibrium price and equilibrium
quantity. An increase in supply produces a higher equilibrium quantity but a lower
equilibrium price.
Graphically the situation can be represented by two curves: one showing the price-quantity
combinations buyers will pay for, or the demand curve; and one showing the price-quantity
combinations suppliers will bring into the market, or the supply curve. The buyers’ and
sellers’ willingness and ability to buy and sell balance out the market, where demand and
supply are in equilibrium, that is, where the curves intersect.
Demand and supply schedule for cut jeans
The quantity demanded Price The quantity supplied
200 $400 3000
500 $350 2400
800 $300 1600
1200 $225 1200
1600 $175 800
2400 $100 500
3000 $50 200

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In a free market, as it has been mentioned above, prices are determined by the interaction of
the forces of supply and demand.
To the economists, in most mixed economies prices ration scarce resources, motivate
production and provide answers to the What, How and Who questions.
 Since there is not enough of everything to go around goods and services are allocated, or
distributed, based on their price. To put it another way, the more scarce something is, the
higher the price will be and the fewer people will want to buy it. Economists describe this as
the rationing effect of prices.
 Price increases and decreases also send messages to suppliers and potential suppliers of
goods and services. Price increases attract additional producers. Price decreases drive
producers out of the market. Production-motivating function of prices refers to the way prices
encourage producers to increase or decrease the level of output. By doing this prices help the
economy maintain allocative efficiency and productive efficiency.
At the same time economists stress the importance of the price system in determining how
much will be produced. Every economy faces certain basic choices. Among them, the most
important are what goods should be produced, how they should be produced and for whom
the results of economic activity should be made available.

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 Prices act as signals to buyers and sellers. One of the things that prices do is carry
information to buyers and sellers. A product’s demand curve is an important determinant of
how much firms will produce, since it reflects the amount of the product that will be in
demand at each price. Low prices are signals to buyers (consumers), who can now afford to
purchase the things they want. When prices are high enough, they send a signal to sellers
(producers), who can now earn a profit at the new price. Acting in accordance with the profit
motive, business firms produce what the consumers desire. Producers can earn more
revenues by responding to the consumer demand than by ignoring it. Those who sell goods at
prices consumers are not willing to pay will suffer financial losses. In that way prices provide
answer to the question of What to produce.
 Prices encourage efficient production. Prices encourage business people to produce
their goods at the lowest possible cost. The producers’ desire for profit leads them to
introduce new production methods to lower production costs.
Firms that are efficient will produce more goods with fewer raw materials than firms that are
inefficient. The quest for greater effciency motivates producers to succeed in competitive
activity. While these efforts are in the best interests of the sellers, all of consumers may
benefit because they are provided with the things they want at lower costs. In such a way the
price system carry out the task of determining how goods and services are produced.
 How the price system determines how society’s output will be distributed among the
people. Finally, prices help to determine who will receive the nation's output of goods and
services. Under the price system, each person’s income is determined in the market place.
Some people are endowed with talent, skill, intelligence, education or special training and
earn more, on the average, than those who are not endowed with such qualities. What the
worker can buy with his wage will depend, in turn, upon the prices of the goods and services
the worker would like to own. Consumers who are willing and able to pay the equilibrium
price (or more) buy a desired product, while those who are unwilling or unable to pay this
price have to do without this product. Thus, by assigning values to the work people perform,
the price system answers the Who question.

COMMENTS:
the flesh and blood of the economic system – плоть та кров економічної системи;

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Exercise 1. Read, translate into Ukrainian in written form and memorize the definitions of the
following economic terms and concepts.
1. Equilibrium: A condition of a market __________________________________________
in which buyers’ and sellers’ plans exactly
coincide, so that the quantity supplied
exactly equals the quantity demanded at a
current price.
2. Equilibrium price: the price at which
the quantity of goods or services offered by
suppliers is exactly equal to the quantity that
is demanded by purchasers in a particular
time period.
3. Excess demand (shortage): the amount
of a product that could be sold at a price
lower than the market price.
4. Excess supply (surplus): the amount of
a product available at a price higher than the
market price.
5. Market clearing: the equality of supply
and demand.
6. Market price: the price that prevails in
a market and at which commodities are
actually exchanged for money.
7. Price: the money value of goods and
services.
8. Price system: an economic system in
which resources are allocated as a result of
the interaction of the forces of supply and
demand.
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Exercise 2. Give the Ukrainian equivalents for the following.

1. the pricing of goods and services __________________________________________________
2. price-directed market economies __________________________________________________
3. the interaction of supply and demand _______________________________________________
4. a unit of goods or services ________________________________________________________
5. to make production and consumption decisions _______________________________________
6. to put a similar limit on __________________________________________________________
7. the quantity supplied of a certain product exactly equals the quantity demanded -____________
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8. at prices above the equilibrium price _______________________________________________
9. to bring the market back into equilibrium ____________________________________________
10. in response to the lower prices ____________________________________________________
11. until the equilibrium is restored ___________________________________________________
12. a decrease in both the equilibrium price and equilibrium quantity _________________________
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13. to balance out the market ________________________________________________________
14. the rationing effect of prices ______________________________________________________
15. to send messages to _____________________________________________________________
16. allocative efficiency ____________________________________________________________
17. to stress the importance of the price system __________________________________________
18. to be in demand at each price _____________________________________________________
19. by responding to consumer demand ________________________________________________
20. the quest for greater effciency _____________________________________________________
21. to assign values to the work ______________________________________________________

Exercise 3. Find the English equivalents for the following.

1. вкрай чогось хотіти ____________________________________________________________
2. лежати в основі _______________________________________________________________
3. за такої системи/при такій системі _______________________________________________
4. об’єднати два поняття __________________________________________________________
5. бути обмеженим законом попиту ________________________________________________
6. величина пропозиції дорівнює величині попиту ____________________________________
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7. ринкова ціна пристосовується/узгоджується _______________________________________
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8. реакція ціни __________________________________________________________________
9. за цінами нижчими за рівноважну ціну ___________________________________________
10. товари та послуги швидко розкуповуються ________________________________________
11. величина попиту та величина пропозиції однакові __________________________________
12. криві перетинаються ___________________________________________________________
13. спонукати виробництво ________________________________________________________
14. витискувати виробників з ринку _________________________________________________
15. функція мотивації виробництва __________________________________________________
16. рівень обсягу виробництва ______________________________________________________
17. економічна ефективність виробництва ____________________________________________
18. передавати інформацію/інформувати _____________________________________________
19. бажання виробників мати прибуток ______________________________________________
20. досягти успіхів у конкурентній боротьбі __________________________________________
21. бути наділеним талантом, вмінням, інтелектом, освітою або спеціальною підготовкою ___
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Exercise 4. Match these adjectives and nouns as they occur together in the text: translate the
expressions they make into Ukrainian.
allocative limit
economic efficiency
efficient consequence
free production
inevitable efficiency
productive equilibrium
similar market

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Exercise 5. Match these nouns/noun phrases, prepositions (if necessary) and nouns/noun phrases
as they occur together in the text: translate the expressions they make into Ukrainian.
an equilibrium profit
a price a product
the producers’ desire level
a profit to supply and demand
a signal for greater effciency
an equilibrium motive
an interaction sellers
the quest response

Exercise 6. Match the verbs/verbal phrases, prepositions (if necessary) and nouns/noun phrases as
they occur together in the text: translate the expressions they make into Ukrainian.
to ration competitive activity
to be equal the heart of
by
to bring scarce resources
in
to succeed at an assumption
not to be set to the quantity demanded
to introduce into equilibrium
to lie government
to refer new production methods

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Exercise 7. Copy out from the texts the sentences containing the following words and word-
combinations and translate these sentences into Ukrainian.
1. most democracies - _____________________________________________________________
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2. make production and consumption decisions - ________________________________________
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3. to find equilibrium prices - ________________________________________________________
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4. refers to an assumption - _________________________________________________________
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5. this price response - _____________________________________________________________
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6. the equilibrium level - ___________________________________________________________
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7. are in equilibrium - ______________________________________________________________
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8. the level of output - _____________________________________________________________
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9. the quest for - __________________________________________________________________
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10. buy a desired product - ___________________________________________________________
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Exercise 8. Choose from the box the words and word-combinations having t he same or similar meaning
to the words listed below. More than one is possible.
1. знаходитись рівновазі (3)

2. в пошуках чогось (3)

3. в середньому (2)
4. дорівнювати (3)
5. досягати мети (4)
6. економічна ефективність виробництва (2)
7. досягати ціни (3)

8. нестача (3)

9. розподіляти (3)
10. об’єднувати (3)
11. надлишок (3)

12. обходитись без чогось (2)

13. повідомляти когось (3)

14. пошук чогось (3)

15. приводити до рівноваги (2)
16. припущення (2)
17. структура (2)

a surplus to attain one’s goal on the average an excess quantity supplied

a structure the search for to be in balance in pursuit of to ration
the pursuit for to attain a price to do without to put together supposition
to distribute in quest of to gain one’s end to achieve a price in search of
at an average to balance to bring together to be balanced a framework
to combine to send a message to to match production efficiency a shortage
assumption the excess supply to allocate to reach one’s purpose to equal
to inform to balance out the quest for to arrive at a price to be equal
productive efficiency to carry information to the excess demand to manage without
an excess quantity demanded to achieve one’s ambition to be in/at equilibrium

Exercise 9. Translate the words in brackets into English.

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In economic theory, the price resulting from … (взаємодії пропозиції та попиту) is known as …
(рівноважна або ринкова ціна). Market price can be represented graphically as … (точка
перетину кривих пропозиції та попиту).
We may think of demand as … (ринкову силу) tending … (підвищувати ціну товару), and of
supply as a force tending … (знижувати ціни). When these two market forces … (урівноважують
одна іншу), the price … (а ні зростають, а ні падають), but will be stable.
Thus, … (рівновага існує) when the quantity supplied … (точно дорівнює величині попиту).
If the price is set too high, … (надмірна пропозиція) will be created within the economy and there
will be … (неефективність розподілу ресурсів) and … (економічна неефективність
виробництва). … (постачальники) are striving … (запропонувати більше товарів на продаж),
hoping … (збільшити надходження), but those consuming the goods will find … (що вироби
менш привабливі) and purchase less because … (ціна занадто висока).
… (надмірний попит) is created when price is set … (нижче рівноважної ціни). Since … (ціна
така низька), too many consumers want to purchase this product but there are too few goods being
produced … (задовольнити існуючий споживчий попит).
However, as consumers have … (конкурувати один з іншим) to buy the product … (за цією
низькою ціною), … (збільшений попит) will push the price up, forcing producers …(збільшити
обсяг виробництва) and bringing the price to … (до ринкової рівноваги).
In conclusion … (зміни попиту або пропозиції) will affect market price. … (за умови, що
нецінові визначники утримуються сталими), … (збільшення попиту) will result in …
(збільшення ринкової ціни), and a decrease in demand … (призведе до зниження ринкової
ціни). … (таким же чином), … (збільшення пропозиції спричинить) a decrease in market price,
and a decrease in supply … (призведе до підвищення ринкової ціни).

Exercise 10. Pair the halves of the sentences and write the completed sentences. Translate them into Ukrainian.
1. When the price in a market rises, quantity the interaction of supply and demand in a
demanded falls and market for a particular commodity.
2. Market or equilibrium price can be the quantity supplied will exceed the quantity
represented graphically as demanded, driving the price down.
3. The equilibrium is attained in the market by shifting scarce resources such as raw
materials and labor to the production of
demanded items.
4. In a free market economy, prices are set as the point of intersection of the supply and
a result of demand curves.
5. The price system allocates goods and which are in demand and at reasonable prices
recources operate profitably.
6. At any price below the equilibrium point, above the market equilibrium.
7. The decreased demand makes producers consumers will buy fewer units than they did
reduce the output, at equilibrium.
8. Surplus occurs when the established price is when supply of a particular product exactly
equals demand for it.
9. At any price above the equilibrium point, the amount that buyers are willing to purchase
at that price.
10. Entrepreneurs who offer for sale those in order not to suffer financial losses.
goods and services
11. Market clearing means that the amount of a there will be excess demand.

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commodity brought into the market at a current
price equals
12. If the market for a certain product is already quantity supplied goes up until the equilibrium
in equilibrium and producers raise prices,
13. Producers respond to the increased by rationing them among those buyers who
consumer demand
14. At any prices lower than the market price
Completed sentences
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is reached.
are willing and able to buy them at a given
price.
the quantity demanded will exceed the
quantity supplied, driving the price up.
Translation
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Exercise 11. Translate the text into Ukrainian.
1. No economic system distributes income __________________________________________
and allocates resources to everyone’s
satisfaction.
2. Mixed economies turn to the market
system as well as to the list of government
regulations and governmentally provided
goods and services.
3. The market system provides a means for
suppliers to show scarcity and for
consumers to demonstrate their desires.
4. The communication between suppliers
and consumers takes place through prices.
5. A price is the sum or amount of money
at which a thing is valued, or the value that
a seller sets on his goods in a market.
6. In a pure market economy prices
through the free interaction of supply-and-
demand forces ration scarce resources,
motivate production, and provide answers to
the fundamental economic questions of
What, How and for Whom to produce.
7. The price system adjusts production to
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consumers’ demand in answering the basic
economic question of what will be
produced.
8. To succeed in competitive activity
producers are forced to produce goods and
services at the lowest possible costs.
9. To put it another way, competition tends
to motivate producers to introduce efficient
production methods in answering how
production will occur.
10. By assigning values to the work people
perform according to the quantities and
qualities of resources of various kinds that a
person owns, the price system determines
how much an individual has to spend.
11. So, the price system allocates goods and
resources at prices which are reasonable
enough to bring these goods and resources
into the market.
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Exercise 12. Match each term in column A with its definition in column B.
A B
1. Equilibrium a. An excess quantity demanded over quantity supplied that
occurs when a price is below the equilibrium price.
2. Equilibrium price b. A mechanism that allocates scarce resources among those
buyers and sellers in the marketplace who are willing and
able to deal at the going price.
3. Market price c. The quantity of a commodity determined in the market by the
intersection of a supply curve and a demand.
4. Market clearing d. The market conditions under which market supply and
demand balance each other and, as a result, prices become
stable.
5. Equilibrium quantity e. The amount, usually of money when something is bought or
sold.
6. Excess supply f. The price of a good or services at which the quantity
demanded matches the quantity supplied.
7. Excess demand g. The price at which goods or services and money will actually
be exchanged.
8. Price h. An excess quantity supplied over quantity demanded that
occurs when a price is above the equilibrium price.
9. Price system i. The adjustment of the price resulting in the establishment of a
new market price at which the supply and demand are in
balance.

1 2 3 4 5 6 7 8 9

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Exercise 13. Translate into English using the active vocabulary.
1. Ціни – це механізм, що
використовується для розміщення
обмежених ресурсів між конкуруючими
потребами.
2. Цінова система визначає, як ціну
товарів та послуг, які люди хочуть
придбати, так і розмір прибутку, який
люди можуть витратити, щоб купити ці
товари та послуги.
3. Ринкові ціни визначають, хто купить
товари, а хто піде додому без покупок.
4. Коли на ринку існує надмірний попит,
покупці не можуть купити кількість
продукції, яку вони бажають і тому
змушені обходитись без неї.
5. Коли на ринку існує надлишок
пропозиції, продавці не можуть продати
ту кількість продукції, яку вони
спроможні запропонувати на продаж.
6. Нестача – це перебільшення
величини попиту на величиною
пропозиції.
7. Надлишок – це перебільшення
величини пропозиції над величиною
попиту.
8. Рівновага пропозиції та попиту на
ринку досягається при ціні, коли сили
пропозиції і попиту збалансовані.
9. Перетин кривих пропозиції та попиту
показує рівноважну ціну та рівноважну
кількість.
10. Зміни в особистих прибутках, зміни у
наданні переваги з боку споживачів або
зміни цін на товари-супутники або
товари-замінники встановлюють нове
співвідношення між ціною та величиною
попиту.
11. Встановлюється нове співвідношення
між ціною та величиною пропозиції,
коли пропозиція знаходиться під впливом
таких факторів, як витрати виробництва,
кількість продаців на ринку, зміни в
очікуваннях виробників щодо майбутньої
ринкової кон’юктури.
12. Щоб мати можливість продавати
свою продукцію за ринковою ціною та не
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зазнавати фінансових збитків, виробники __________________________________________
намагаються зменшити витрати __________________________________________
виробництва, змінюючи технології __________________________________________
виробництва. __________________________________________

Exercise 14. Answer the following questions.

1. What is a price?
2. Why are prices the key ingredients in a market economy?
3. What is a price system?
4. What is a price for any commodity determined by in a free market?
5. What functions do prices perform?
6. How do prices ration scarce resources?
7. How do prices perform production-motivating function?
8. Why do economists stress the importance of the price system in answering the fundamental
economic questions?
9. Why do prices act as signals to buyers and sellers?
10. In what way does the price system provide answer to the question of What to produce?
11. Why cannot producers ignore consumer demand?
12. What is the correlation between prices and production?
13. How does the price system provide answer to the How question?
14. Why do producers do their best to reduce production costs?
15. What is the producers’ main incentive?
16. How does the price system distribute society’s output among the people?
17. Why does the price system determine each person’s income?
18. Why do some buyers go home empty handed?
19. What is an equilibrium price?
20. Why is it important to find equilibrium prices in markets?
21. Why does the law of demand put limits on suppliers while consumers are limited by the law of
supply?
22. What does market clearing refer to?
23. What is excess supply?
24. What process occurs to bring the market back into equilibrium, when there is a surplus in the
market?
25. What are the ways of reallocating resources when the established price is below the market
equilibrium?
26. What is a shortage and when does it develop?
27. What process occurs to bring the market back into equilibrium, when there is excess demand in
the market?
28. What is the difference between scarcity and shortage?
29. What does a decrease in demand lead to?
30. What does an increase in supply result in?
31. How is an economic equilibrium represented graphically?

Questions for economic reasoning and discussion

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1. From the following data, plot the supply and demand curves and determine the equilibrium price
and quantity.
Supply of Pizzas and Demand for Pizzas
Price Quantity demanded Quantity supplied
10 0 40
8 10 30
6 20 20
4 30 10
2 40 2
1 100 0

a. What would happen if the demand for pizzas tripled at each price?
b. What would occur if the price were initially set at 4 hryvnyas?
c. How can basic supply-and-demand models be used to explain such concepts as shortage and
surplus?
d. How do supply and demand interact to determine the market price of a good or service?
e. Why do market prices and quantities change in response to changes in market conditions?

2. "When the forces of supply and demand are at work in a market economy, the equilibrium price
is the only one that matters. All other prices are irrelevant (недоречні)." Explain this statement.

3. Explain why price and quantity move to the equilibrium price and the equilibrium quantity in a
market economy.

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4. Explain why each of the following is false:
a. A freeze in Brazil’s coffee-growing region will lower the price of coffee.
b. The high price of oil resulting from political disturbances in the Middle East will lower the
demand for oil.
c. Concerns about the health effects of meat will lower the price of butter and raise the price of
leather jackets.

5. Choose the right variant. Only one is possible.

1. “Prices act as signals to the market.” This means that

a. prices affect the kinds and amounts of goods and services offered for sale.
b. profits increase as prices rise.
c. high prices signal a healthy economy.
d. people wait for supply and demand schedules to be published before making decisions.

2. In a market economy, prices serve as …, provide …, and affect the …

a. signals, incentive, distribution of income
b. distribution of income, signals, incentive
c. signals, distribution of income, incentive
d. incentive, signals, distribution of income

3. In a simple model of the supply and demand for pizza, when the price of cheese increases, the
price of pizza … and the quantity demanded ….
a. increases; increases
b. decreases; increases
c. decreases; decreases
d. increases; decreases

4. In a competitive market, the equilibrium or market price is

a. determined by consumer decisions.
b. the lowest price producers can charge and still make a profit.
c. determined by a government agency.
d. the price at which consumers will buy all the goods producers are willing to sell.

5. What will happen in a competitive market if the quantity supplied exceeds the quantity
demanded?
a. Consumers will demand more goods.
b. Suppliers will increase their output of goods.
c. The market price will go down.
d. The market price will go up.

6. When an item becomes scarce, its price rises and, as a result, fewer people buy it. This
statement illustrates
a. the rationing effect of prices.
b. the production-motivating effect of prices.
c. the law of supply.

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d. the effect of a shift in demand.

7. There is a price elasticity of demand for frozen orange juice. If there is a severe frost which
destroys large quantities of oranges we expect to see
a. No change in the market price and no change in spending
b. A rise in the market price and a fall in spending on orange juice
c. An increase in the market price and no change in spending
d. A fall in the market price and a rise in spending on orange juice

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