Summary AQA A-level Microeconomics Revision Notes - Market Failure & Government Intervention

C
MICRO


CONOMICS
SCHEDULE C NOTES

, THE PRICE MECHANISM (THE INVISIBLE HAND) (the determination of equilibrium market prices
(y)
·

Eg. INCREASE IN DEMAND income increases
- demand increases >
given
consumers able to
buy at each
-




price

kept price the same with demand increased
·

priceD D
, Si if firm -
left excess >
-
demand has ,
supply has

-
changed in disequilibrium demand
-
not market now
greater than
supply
↳
P
, o- - - - - - signal from the market to supply more >
-

firms increase incentive to produce by




-----
-




· ..
P
,
increasing price ->
they would not be able to produce any more products at price
so it is a movement ALONG the
supply curve
.


increase in decrease in
·


simultaneously to demand - there is a demand people
9uantity
-
>

Q Qd
willing and able to called CONTRACTION -
demand this
are less
buy- of >




RATIONING and continue until
process of increasing price the demand
decreasing will


there is no
longer a signal
·
the market is back in equilibrium at higher price (P , and Q1)
INCREASE IN SUPPLY


Eg
·

2
. increase in new
machinery
-
supply increases >
-
firms more able and willing to

D
price S
Si
produce at
every given price.
if firm kept price the same -> left with excess
supply
->
Supply has greater,
demand has not -
changed market now in disequilibrium




:
↳ reduces incentive
signal from reduce price firms produce
>
market to the to to
by
-




decreasing price price P
,
->
they are less able and
willing to
supply at the lower ,
-




down and
quanting movement
along the
supply curve .



simultaneously decrease in price the demand increases
·

to >
- ->
consumers are



willing called expansion of demand
more able and to
buy products-
>



↳ demand
this
rationing process of decreasing price and the
increasing will

continue until there is no
longer a
signal
the market is back in equilibrium at lower price (P , and Q1)
Eg3 DECREASE IN DEMAND

a demand
change in taste decrease in consumers less able
>
of consumers
- a -




P S and
price p ,
willing to
buy products

if firm kept price is
with
supply
>
the same -
left excess
supply
-

greater than

demand
-> market now in disequilibrium




:
↳
signal from the market to reduce the price -> > less incentive for firms to


produce by decreasing price - less able and
willing to produce at a lower price
,

quantity P - movement down and
along the supply curve


demand increases
simultaneously
·
to decrease in price
-> the - consumers

demand
are more
willing and able to
buy - expansion of

↳
this
rationing process decreasing Price so demand increases will continue until

there is no
longer a
signal.
Eg 4 ·
the market is back in equilibrium at lower price (P , and Q ,)

DECREASE IN SUPPLY
Si
·
D S in
price increase workers wages decreases supply firms are less
willing and able
->
an >
-




to produce at
every given price




:
if firm kept price the same left with excess demand demand greater than
supply
>
- >
-




↳ market now in disequilibrium >
signal is sent to firms to increase price so there becomes
-
-




incentive and able
more of an to produce by increasing price -
they are more willing to produce.

Creates
quantity a movement up and along the supply curve
.


demand decreases
simultaneously willing
>
to an increase in price consumers are less and
-
>
-




products demand
.
able to
buy - contraction of
↳
this
rationing process of increasing price so
supply increases will continue until there is


no
longer a
signal from the market