Market Equilibrium and Price Determination

    OCR
    GCSE

    Analysis of the determination of equilibrium price and quantity through the interaction of demand and supply curves in a free market. Candidates must evaluate the rationing, signalling, and incentive functions of the price mechanism in allocating scarce resources. The study necessitates a rigorous application of the 'ceteris paribus' assumption to isolate variables and an assessment of how elasticity determines the magnitude of price and quantity changes following a shift in market forces.

    5
    Objectives
    4
    Exam Tips
    3
    Pitfalls
    3
    Key Terms
    4
    Mark Points

    Learning Objectives

    What you need to know and understand

    • Definition of Equilibrium: Where Quantity Demanded equals Quantity Supplied (Qd = Qs)
    • Excess Demand (Shortage): Occurs when Price < Equilibrium Price
    • Excess Supply (Surplus): Occurs when Price > Equilibrium Price
    • Market Clearing: The process by which price adjusts to equate Qd and Qs
    • The Law of Supply and Demand: Inverse relationship for demand, direct for supply

    Marking Points

    Key points examiners look for in your answers

    • Award marks for fully labelled diagrams: Price (y), Quantity (x), D, S, Pe, Qe.
    • Credit logical chains of reasoning explaining the elimination of excess demand or supply via price signals.
    • Ensure shifts are distinguished from movements along the curve; arrows must indicate direction.
    • For evaluation, assess the magnitude of the shift or the elasticity of the opposing curve to determine the extent of price change.

    Examiner Tips

    Expert advice for maximising your marks

    • 💡Always draw a diagram for 'Explain' or 'Analyse' questions involving market changes, even if not explicitly requested.
    • 💡Use the mnemonic 'IRDL' (Increase Right, Decrease Left) to ensure correct shift direction.
    • 💡When analysing, use the phrase 'ceteris paribus' to isolate the specific variable changing.
    • 💡In evaluation, consider time lags: does the market clear immediately or is the supply inelastic in the short run?

    Common Mistakes

    Pitfalls to avoid in your exam answers

    • Confusing a 'change in price' (movement) with a 'change in a non-price determinant' (shift).
    • Omitting equilibrium coordinates (Pe, Qe) or new coordinates (P1, Q1) on diagrams.
    • Stating the new price without explaining the market mechanism (pressure from shortage/surplus).

    Study Guide Available

    Comprehensive revision notes & examples

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    Key Terminology

    Essential terms to know

    Likely Command Words

    How questions on this topic are typically asked

    State
    Calculate
    Explain
    Analyse
    Discuss
    Evaluate

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