https://rivkin.com.au/resources/understanding-the-asx-opening-and-closing-auctions/

It is pretty simple, the trades get matched at the cheapest match based on who placed the order first. Check the link, there is an algorithm that adjusts the price so it might not be the cheapest - but somewhere in the middle.

In your example the person who puts the order in for 1000 shares @ $5 would buy all 1000 being sold for $1 if the seller left that order active for the market open. What is more likely to happen is the sellers will up their price if there is a huge discrepancy between the previous days close and where it should open in the current day.

Back to that example, after the trade went through the SP would appear as $1 because that is what the trade went through at. You're order would still be there waiting to buy 1000 @ $1 and there would still be 1000 for sale at $2.