Lesson 1.2.6

1.2.6 Price determination Quiz: Pearson Edexcel Economics A, Unit 1

20 questions

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Lesson 1.2.6, Price determination: 20 multiple choice questions for the Pearson Edexcel Economics A (9EC0), Unit 1: Theme 1: Introduction to markets and market failure, written with Revision Ninja.

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The 20 questions

  1. What is the equilibrium price in a market?

    • The price at which quantity demanded equals quantity supplied, so there is no tendency for price to change.
    • The lowest price at which producers are willing to supply any quantity of the good in the market.
    • The average price of a good over the year, calculated from all transactions recorded in the period.
    • The highest price that consumers are willing to pay for a good in the market at any time.

  2. What is excess demand?

    • A situation where the market price is set exactly at the equilibrium level with no shortage.
    • A situation where quantity demanded exceeds quantity supplied at the prevailing price.
    • A situation where producers are unable to sell any output because consumers have no income.
    • A situation where quantity supplied exceeds quantity demanded at the prevailing price in the market.

  3. What is excess supply?

    • A situation where quantity supplied exceeds quantity demanded at the prevailing price.
    • A situation where the price has reached the equilibrium level and all goods are sold.
    • A situation where consumers buy every unit that producers offer at the current price in the market.
    • A situation where quantity demanded exceeds quantity supplied at the prevailing price in the market.

  4. When price is above equilibrium in a free market, what happens and why?

    • The market stays at this price permanently, since prices never change in a free market economy.
    • Excess supply occurs, so competition among sellers pushes the price down towards equilibrium.
    • Quantity demanded rises, so producers raise the price further until excess supply disappears.
    • Excess demand occurs, so buyers bid up the price towards a higher equilibrium level in the market.

  5. When price is below equilibrium in a free market, what is the likely outcome?

    • Excess demand causes buyers to compete and push the price up towards equilibrium.
    • Excess supply causes sellers to compete and push the price down further below equilibrium.
    • Quantity supplied rises and quantity demanded falls, so the price moves away from equilibrium.
    • The price remains unchanged, since shortages do not affect the price in a free market.

  6. A rise in consumer incomes increases demand for a normal good. What happens to the equilibrium price and quantity?

    • Neither the equilibrium price nor the quantity changes, since income affects only consumer spending power.
    • Both the equilibrium price and quantity rise, since demand shifts to the right along a given supply curve.
    • The equilibrium price falls and quantity rises, since higher demand lowers the cost to consumers.
    • The equilibrium price rises and quantity falls, since higher income reduces the quantity producers supply.

  7. A fall in the cost of production shifts supply to the right. What happens to the equilibrium price and quantity, holding demand constant?

    • The equilibrium price falls and the equilibrium quantity rises.
    • The equilibrium price rises and the equilibrium quantity falls, since lower costs reduce output.
    • Neither the equilibrium price nor quantity changes, since supply has no effect on market outcomes.
    • The equilibrium price rises and the equilibrium quantity rises, since lower costs raise both sides of the market.

  8. A government introduces a tax that shifts supply to the left. Which statement describes the new equilibrium?

    • The equilibrium price rises and the equilibrium quantity falls compared with the original position.
    • The equilibrium price and quantity both fall, since demand and supply shift in the same direction.
    • The equilibrium price and quantity both rise, since the tax increases the amount producers want to sell.
    • The equilibrium price falls and the equilibrium quantity rises compared with the original position.

  9. In a market with excess demand, which force operates to remove the shortage in a free market?

    • Government sets a maximum price, which removes the shortage by increasing supply directly.
    • Sellers raise prices, which reduces quantity demanded and increases quantity supplied until the market clears.
    • Buyers reduce their demand, which lowers the price until excess demand disappears entirely.
    • Producers reduce supply, which increases the price and eliminates the shortage of the good.

  10. Which best describes what happens when demand and supply both increase, with supply increasing by more than demand?

    • The equilibrium quantity falls and the equilibrium price rises, since supply increases less than demand.
    • The equilibrium price and quantity are both unchanged, since the two shifts cancel out completely.
    • The equilibrium price and quantity both rise, since both curves move to the right by the same amount.
    • The equilibrium quantity rises and the equilibrium price falls.

  11. Explain why a market price tends to move towards equilibrium.

    • Prices never move towards equilibrium, since the price mechanism only reflects consumer preferences and not costs.
    • Prices move away from equilibrium over time, because sellers prefer to keep prices high regardless of demand.
    • Excess demand or supply pressures sellers or buyers to change price until quantity demanded equals quantity supplied.
    • Prices move towards equilibrium only when the government intervenes to set a fixed price for the good in the market.

  12. A diagram shows an equilibrium price of 5 pounds. At a price of 7 pounds, quantity supplied is 80 units and quantity demanded is 40 units. What is the situation at 7 pounds?

    • There is no imbalance, since both quantities are positive at a price of 7 pounds in the market.
    • There is excess supply of 80 units, which means the market has no tendency to adjust.
    • There is excess demand of 40 units, which tends to push the price up towards 7 pounds.
    • There is excess supply of 40 units, which tends to push the price down towards 5 pounds.

  13. A market is in equilibrium at a price of 4 pounds. Demand then rises and supply stays the same. Which statement correctly describes the immediate effect at 4 pounds?

    • Excess demand appears at 4 pounds, which pushes the price upwards towards a new equilibrium.
    • Quantity supplied rises automatically, removing any imbalance without any change in the price.
    • Excess supply appears at 4 pounds, which pushes the price downwards towards a lower equilibrium.
    • The market remains in equilibrium at 4 pounds, since a rise in demand does not affect the price.

  14. Which of the following best describes the role of the price mechanism in allocating scarce goods in a market?

    • Price adjusts to balance demand and supply, so goods are allocated to those willing and able to pay.
    • Price has no role, since goods are allocated by queueing and random selection in every market.
    • Price is fixed by the government, so goods are allocated to those with the highest political influence.
    • Price is set by producers alone, so goods are allocated to whoever produces them first in the market.

  15. Evaluate: is the equilibrium price always the best outcome for society?

    • Yes, because the government is never able to improve on market equilibrium in any circumstances.
    • No, because equilibrium always produces excess supply, which harms producers in every market.
    • Not necessarily, since equilibrium is allocatively efficient but may ignore externalities or equity concerns that justify intervention.
    • Yes, because equilibrium always maximises the welfare of every household and firm in the economy.

  16. A fall in demand for a good, with supply unchanged, causes what?

    • Excess supply at the original price, so the price falls towards the new equilibrium.
    • Excess demand at the original price, so the price rises towards the new equilibrium.
    • A rise in quantity supplied, since sellers respond to lower demand by producing more.
    • No change in price, since demand changes do not affect the equilibrium in any market.

  17. Which best explains why a seasonal rise in demand for ice cream on a hot day raises its equilibrium price in the short run?

    • Demand shifts right, creating excess demand at the old price, which bids the price up to a new equilibrium.
    • Supply shifts right, so sellers can raise the price while selling more units to customers.
    • Consumers pay more because the price mechanism is suspended during hot weather in the economy.
    • Demand shifts left, so sellers must raise the price to cover the fall in sales on the day.

  18. Which statement about price adjustment in a free market is correct?

    • Prices rise whenever excess supply exists, since sellers gain more power when stocks build up.
    • Prices are unaffected by excess supply, since sellers always hold prices fixed for the whole season.
    • Prices adjust only when the government issues an official notice of the new equilibrium price.
    • Prices adjust when there is excess demand or excess supply, moving the market towards equilibrium.

  19. A market has excess demand of 30 units at the current price. Which change would most directly remove it through the price mechanism?

    • A fall in the number of buyers, which reduces quantity demanded by a smaller amount than needed.
    • A fall in the price, which increases quantity demanded and reduces quantity supplied.
    • A cut in production by all sellers, which reduces quantity supplied to match demand exactly.
    • A rise in the price, which reduces quantity demanded and increases quantity supplied.

  20. Which of these would shift demand for a good to the right and so raise its equilibrium price?

    • A rise in the cost of raw materials used to make the good itself.
    • A fall in the price of a substitute good that consumers switch away to buy.
    • A fall in the number of consumers buying the good in the market.
    • A rise in consumer incomes for a normal good.

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