1.2 How markets work (1.2.6 - 1.2.8)

Question 1

What is supply?

Answer 1

your willingness and ability to sell a good or service at a given price and at a given time period

Question 2

What is an incentive?

Answer 2

A thing that motivates or encourages somebody to do something

Question 3

When a firm’s profits increases, what is it incentivised to do?

Answer 3

• to increase output, as the more it produces, the more profit it will earn

Question 4

When costs of production decreases for a firm, what is it incentivized to do?

Answer 4

to supply a higher quantity at a given price

Question 5

What is a subsidy?

Answer 5

A sum of money granted by the state or public body to help an industry or business keep the price of a commodity or service low

Question 6

How can subsidies encourage firms?

Answer 6

subsidies can lower a firms average cost per unit, encouraging them to expand production

Question 7

What can cause supply curves to shift?

Answer 7

• changes in the price of inputs
• advancements in technology
• changes in government policies, e.g taxes
• change in productivity

Question 8

Do taxes increase or decrease supply?

Answer 8

Decrease supply, as taxes are treated as a cost by firms, and higher costs decreases supply

Question 9

What is the law of supply?

Answer 9

• the positive relationship between price and quantity supplied
• as price increases, quantity supplied increases

Question 10

What will a rise in price almost always lead to?

Answer 10

an increase in quantity supplied

Question 11

What four factors increases supply?

Answer 11

1. improvement in technology
2. Price rise
3. Fall in indirect tax
4. increases in productivity

Question 12

What is price elasticity of supply?

Answer 12

it measures the responsiveness of quantity supplied to a change in price

Question 13

How can firms increase elasticity?

Answer 13

• improve their technology
• introduce flexible working patterns
• have excess production capacity

Question 14

When is supply elastic?

Answer 14

When PES > 1

Question 15

When is supply inelastic?

Answer 15

1 > PES > 0
- a smaller PES value means more inelastic supply

Question 16

When is supply unit elastic?

Answer 16

PES = 1

Question 17

What is the formula for PES?

Answer 17

PES = % change in quantity supplied ÷ % change in price.

Question 18

What are factors affecting PES?

Answer 18

• perishability
• levels of stock
• time

Question 19

Is supply more elastic or inelastic in the long run?

Answer 19

elastic

Question 20

What is a market in economics?

Answer 20

any structure that allows buyers and sellers to exchange any type of goods, services and information

Question 21

What is equilibrium?

Answer 21

a state of rest, where price and quantity are stable

Question 22

What is the equilibrium on a graph?

Answer 22

the point where the demand curve meets the supply curve

Question 23

In a free market, how is equilibrium dictated?

Answer 23

the point of equilibrium is determined by the forces of demand and supply in an economy. These are called market forces

Question 24

What is disequilibrium?

Answer 24

when the market is not at a stable price and quantity

Question 25

If the market is not at equilibrium, what arises?

Answer 25

economic pressure arises to move the market towards a stable price and quantity

Question 26

An excess of what two things can occur at disequilibrium?

Answer 26

an excess of supply and demand

Question 27

Define the equilibrium price

Answer 27

this is the only price where the amount consumers want to buy is equal to the amount producers want to sell