1.1.3 Demand, supply and market equilibrium

• how do uber remove excess demand?

  by using dynamic pricing or price surging. when demand is high, eg. New Years then prices are increased sharply, this lowers demand and discourages consumers. Higher fares mean that dormant drivers start driving again so supply of drivers increases and amplifies the removal of excess demand. when supply and demand get closer then the timings are restored back to normal levels.
• what market forces can be used to remove excess supply?

  lowering prices to increase demand. or storing stock to release to the market later on but this might mean that food could go bad, storing would cost money.
• how does a shift in supply AND demand impact market equilibrium?


  if you know by how much, the graph can be redrawn to show the new market equilibrium. if D shifts out and S shifts in, then the new market equilibrium shows that less is sold at a higher price.
• how does a shift in supply impact market equilibrium?

  When S increases, P will fall, S graph shifts to the right, there is a new market equilibrium as more is being bought at a lower price while demand does not change (on the graph).
• how does a shift in demand impact market equilibrium?

  when D increases, P will rise, D shifts to the right, there is a new market equilibrium as more is being bought at a higher price but supply is unchanged (on the graph).
• what does volatile mean?

  a quick sudden change such as a volatile market which fluctuates without warning.
• what are the negative impacts of giving out subsidies?

  producers may lack the incentive to improve efficiency. Also the government could have used the money elsewhere.
• what is a subsidy?


  a payment provided by a government to businesses to encourage the production of a good or service such as biofuels which are more environmental friendly.
• what is an example of when new technology was used to shift supply?

  in 2014 when the price of oil fell sharply, oil companies began to use lasers and other technology to measure potential yield from oil wells or technology used help produce more oil from older wells.
• what market forces can be used to remove excess demand?

  adjusting supply or prices. Higher prices eliminate excess demand or increasing supply can help meet market equilibrium.
• what is excess supply

  QS > QD, above equilibrium, a surplus of goods which remain unsold leaving leftover stock
• what is excess demand?

  QD > QS, below equilibrium, a shortage of goods
• how is market equilibrium shown on a diagram?

  
• what is market equilibrium?

  the price where Supply = Demand, with no surplus or shortages, this is the market clearing price meaning that everything being supplied is bought which means it is in balance.
• how do you change cost of production?

  any change in the input (CELL) such as wages, raw materials, rents, interest rates
• How does the cost of production impact QS?

  QS is influenced by COP, if price is fixed and the cost of raw materials increases and COP rises then supply will fall, the graph shifts to the left. whereas if costs fall then supply increases as it is more profitable. the supply curve shifts to the right. A shortage of the CELL factors will make it difficult to produce, cause prices rise and shift supply to the left.
• How do weather or natural factors impact QS?

  good harvest, natural disasters

  this affects agricultural products the most. better growing conditions mean good harvest and improves crop yield, shifting supply to the right. excess supply means supplying more at lower prices poor growing conditions such as natural disasters, bad weather and pests can increase price and would shift supply to the left.
• How do subsidies impact QS?


  They encourage production of specific goods/services. for example specific agricultural products. The subsidies reduce production costs and supply shifts to the right.
• How does technology impact QS?

  improvements in technology increases efficiency and improves the production process whilst lowering the COP so firms are likely to offer more goods for sale. graph shifts right.
• How does the number of firms impact QS?

  more firms in the market = more supply and more competition so firms may lower prices to keep demand high. graph shifts right
• How does indirect tax impact QS?

  indirect tax are taxes from the government such as VAT, when imposed they shift the graph to the left as firms face higher costs and price increases, meaning it is less worthwhile for the business to produce it. This increases government revenue and discourages consumption of harmful products. Cigarettes and harmful goods have higher tax however if people are addicted they may continue to purchase regardless of price.
• How does productivity impact QS?

  increases efficiency as more output is produced. low production costs means increase in quantity and supply and shifts the graph to the right
• what factors impact the supply curve?

  1) Productivity

  2) Indirect Tax

  3) Number of Firms

  4) Technology

  5) Subsidies

  6) Weather/Natural Factors

  7) Cost of Production
• what causes movement ALONG a supply curve?

  price changes
• if you have perfect inelastic supply how can you maximise profit?


  if there is a shift in demand outwards you can't change supply but you can increase profit in order to maximise profit.
• what is fixed supply?

  the supply curve is vertical. if price changes supply does not change, it is FIXED . eg. seats at a venue.
• what do the equations for revenue and profit tell us?

  1) if cost increases, profit decreases, supply decreases

  
  

  OR

  
  

  2) if cost decreases, profit increases, supply increases.
• what is the equation for revenue?

  Revenue = Price x Quantity
• what is profit?


  the money that remains after the cost of production has been subtracted from the money earned from sales.
• what is the equation for profit?

  total revenue - total cost
• how do you figure out revenue from a supply curve?

  P X Q of that dotted square
• what do we assume about suppliers?

  they are rational and focus on profit maximisation. they want to supply more at higher prices.
• what relationship does the supply curve have?

  a positive or direct relationship. As prices increase, QS increases and supply increases to maximise Profit.
• what does a supply curve show and tell us?

  relationship between price and quantity supplied. if price goes down then supply also goes down.
• what does a supply curve look like?

  proportional and upward sloping to the right

  
• what is supply?

  the willingness and ability of suppliers to produce goods/services at a given price
• How do interest rates impact demand?

  if interest rates rise, demand for expensive goods decreases as they require borrowing/loans.
• what are interest rates?

  the cost of borrowing and the return of saving. If you take out a loan you have to pay the bank more than you took out.
• what is a substitute?

  goods bought as an alternative to another but carry out the same function and
• How do substitutes impact demand?

  if one product increases price then demand falls and demand for substitutes increases.