1.2 How markets work (1.2.6 - 1.2.8) Flashcards
What is supply?
your willingness and ability to sell a good or service at a given price and at a given time period
What is an incentive?
A thing that motivates or encourages somebody to do something
When a firm’s profits increases, what is it incentivised to do?
- to increase output, as the more it produces, the more profit it will earn
When costs of production decreases for a firm, what is it incentivized to do?
to supply a higher quantity at a given price
What is a subsidy?
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
How can subsidies encourage firms?
subsidies can lower a firms average cost per unit, encouraging them to expand production
What can cause supply curves to shift?
- changes in the price of inputs
- advancements in technology
- changes in government policies, e.g taxes
- change in productivity
Do taxes increase or decrease supply?
Decrease supply, as taxes are treated as a cost by firms, and higher costs decreases supply
What is the law of supply?
- the positive relationship between price and quantity supplied
- as price increases, quantity supplied increases
What will a rise in price almost always lead to?
an increase in quantity supplied
What four factors increases supply?
- improvement in technology
- Price rise
- Fall in indirect tax
- increases in productivity
What is price elasticity of supply?
it measures the responsiveness of quantity supplied to a change in price
How can firms increase elasticity?
- improve their technology
- introduce flexible working patterns
- have excess production capacity
When is supply elastic?
When PES > 1
When is supply inelastic?
1 > PES > 0
- a smaller PES value means more inelastic supply
When is supply unit elastic?
PES = 1
What is the formula for PES?
PES = % change in quantity supplied ÷ % change in price.
What are factors affecting PES?
- perishability
- levels of stock
- time
Is supply more elastic or inelastic in the long run?
elastic
What is a market in economics?
any structure that allows buyers and sellers to exchange any type of goods, services and information
What is equilibrium?
a state of rest, where price and quantity are stable
What is the equilibrium on a graph?
the point where the demand curve meets the supply curve
In a free market, how is equilibrium dictated?
the point of equilibrium is determined by the forces of demand and supply in an economy. These are called market forces
What is disequilibrium?
when the market is not at a stable price and quantity
If the market is not at equilibrium, what arises?
economic pressure arises to move the market towards a stable price and quantity
An excess of what two things can occur at disequilibrium?
an excess of supply and demand
Define the equilibrium price
this is the only price where the amount consumers want to buy is equal to the amount producers want to sell
