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1.4 What determines the price of a good or service in a market?

What students need to learn:

Students should be able to:
Additional Guidance Notes
Determination of market equilibrium
Explain equilibrium price and quantity and how they are determined.

Understand how the operation of market forces eliminates excess demand and excess supply.
Students should understand that shifts in demand and supply curves will change the equilibrium price and quantity.
Consumer and Producer surplus
Distinguish between consumer and producer surplus.

Illustrate consumer and producer surplus on a demand and supply diagram.
Students should understand how changes in demand or supply might affect consumer and producer surplus.
Functions of the price mechanism
Understand the rationing, incentive and signaling functions of the price mechanism for allocating scarce resources.
The price mechanism may be considered in the context of product, commodity and labour markets.

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