unit 1 go over Flashcards
3 reasons why the supply curve slopes upwards
The profit motive: when the market price rises (for example an increase in consumer demand), it becomes more profitable for businesses to increase their output
Production and costs: when output expands, a firm’s production costs rise, therefore a higher price is needed to justify the extra output and cover these extra costs of production
New entrants coming into the market: higher prices may create an incentive for other businesses to enter the market leading to an increase in supply.
How the price mechanism helps to allocate scarce resources:
Rationing – prices serve to ration scarce resources when demand outstrips supplyWhenever resources are particularly scarce, demand exceeds supply and prices are driven up. The effect of this is to discourage demand and conserve resources. The greater the scarcity, the higher the price and the more the resource is conserved.
(individuals)
Signalling – prices adjust to demonstrate where resources are required, and where they are not (i.e. high price smart phone versus lower priced tablets) (firms)
Price changes send contrasting messages to consumers and producers about whether to enter or leave a market.
Rising prices give a signal to consumers to reduce demand and they give a signal to potential producers to enter a market.
Conversely, falling prices give a positive message to consumers to buy while sending a negative signal to producers to leave a market.
For example, a rise in the market price of’ smartphones sends a signal to potential manufacturers to enter this market, and perhaps leave another one.
Incentives – when the price of a product rises, quantity supplied increased (i.e. if oil prices increases, supply will increase) (firms)
An incentive is something that motivates a producer or consumer to follow a course of action or to change behaviour.
Higher prices provide an incentive to existing producers to supply more because they provide the possibility of more revenue and increased profits.
The incentive function of a price rise is associated with an extension of supply along the existing supply curve.
Determinants of ped
If the good has a number of close substitutes demand for it will be more elastic. (1 mark) This is because consumers will be more likely to switch to another good when the price goes up.(1 development mark) eg branded toothpaste etc. (1 development mark)
If the good is a necessity, demand will be less elastic. (1 mark) e.g. bread or milk. (1 development mark)
If a small proportion of income is spent on the product demand will be relatively inelastic (1 mark) This is because changes in price are less likely to be noticed. (1 development mark) eg crisps.
(1 development mark)
If the goods are purchased frequently demand for it will be more inelastic.
Benefits of the free market mechanism
Buyers are free to purchase any commodity which they like and in whatever amounts.
Allocative efficiency – producing what people want and the price people prepared to pay
The seller of a good or its producer can also produce whichever product they want to and also increase the capacity of any individual commodity depending upon the forces of the market.
Producers are free to undertake the risks and rewards (profits) associated with increases in production.
barriers to entry
Capital costs are fixed, one-time expenses incurred on the purchase of land, buildings, construction, and equipment used in the production of goods or in the rendering of services. In other words, it is the total cost needed to bring a project to a commercially operable status.
Sunk costs A sunk cost refers to a cost that has already occurred and has no potential for recovery in the future. For example, your rent, marketing campaign expenses or money spent on new equipment can be considered sunk costs. A sunk cost can also be referred to as a past cost
Economies of scale
in microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output decreasing with increasing scale
Legal barriers
Barriers to entry are the legal, technological, or market forces that discourage or prevent potential competitors from entering a market. … One is natural monopoly, where the barriers to entry are something other than legal prohibition. The other is legal monopoly, where laws prohibit (or severely limit) competition.
Limit pricing
A limit price is a price, or pricing strategy, where products are sold by a supplier at a price low enough to make it unprofitable for other players to enter the market. It is used by monopolists to discourage entry into a market, and is illegal in many countries
Consequences to government intervention
Using taxation to increase price could result in some businesses passing on the higher costs to consumers. Some forms of taxation can be regressive. This may have inflationary consequences. Some businesses may also have to make workers redundant to compensate for higher costs elsewhere. We lose international competitiveness.
Using subsidies to reduce prices could lead to higher taxes from consumers to pay for this system.
Consumers get no say in what gets subsidised.
Using maximum prices can result in excess demand. If the excess demand is not met by existing producers then it could result in a black market for the product. Low prices can make a business unprofitable. Using minimum prices can result in excess supply which could lead to wasted resources as producers try to exploit the situation.
Explain the law of diminishing marginal returns.
as output increases the efficiency of production falls (ID) causing higher average costs (EXP) (1). If marginal costs are higher than average costs, then average cost is being pulled up (DEV) (1)
this occurs in the short run only (ID) when one factor of production is fixed (for example, capital) (EXP) (1)
describe the powers which have been devolved to the Scottish parliament from the UK government
Vary income tax (1 mark) by plus or minus 3 pence in the pound. (1 development mark)
Collect Land and Buildings Transaction Tax replacing stamp duty. (1 mark)
Control Scottish Landfill Tax to protect the environment. (1 mark)
Control Air Passenger Duty for passengers flying out of UK. (1 mark)
Determine the price of alcohol (1 mark) by setting minimum prices per unit of alcohol/not allowing happy hour/bulk buying
