Question 1: Explain the how the price mechanism works and how it responds to changes in
consumer demand or producer supply. (10 marks) Illustrate the interdependence of markets i.e. how the goods/services market affect the factor market, and the effect of a rise in demand for that good or service. (10 marks)

The Price Mechanism is perhaps the most basic feature of the market economy for allocating resources to various uses.   It is the system in a market economy whereby the decisions of producers determine the supply of commodity and the decisions of buyers determine the demand.   The interaction between the consumers’ demand for a good and the supply of that good by a producer determine the price.

To put more simply; prices are determined by shortages and surpluses.   Normally a shortage of a product causes the price to rise, whereas a surplus causes the price to fall.   The price will determine how much of a product a producer decides to supply.   If the product price is high then profit is greater and more will be supplied due to producer profit motive.   If consumers decide that they want more of a good (or if producers decide to cut back supply), then demand will exceed supply.   The resulting shortage causes the price to rise.  

The result is that consumers will be discouraged to buy as much whereas producers will be encouraged to supply more.   The price of a good will continue to rise until the shortage has been eliminated.   The opposite is true if consumers decide that they want less of a good causing the price to fall until the surplus is eliminated.   As this process is continued we can see that there is only one price at which there is neither upward nor downward pressure on price.   This is termed the equilibrium price and occurs when demand equals supply.

Question 2: Using relevant diagrams and illustrations show the relationship between demand and price. (10 marks) Specific to the travel market rank the determinants of demand in priority...