These notes provide a full and in-depth overview of all the topics covered under AQA A-level Paper 1 topic Market Failure. I made these notes whilst studying for my A levels and achieved an A*. This document includes both notes taken in class, as well as during an additional revision course I priva...
, 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
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