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Frequently Asked Questions - How Market Works

FAQs - How Market Works

Diagram showing a shift on the supply curve to the left and rise in price and fall in quantity.

Explain the diagram  

a decrease in supply will lead to a rise in the equilibrium price and a fall in equilibrium quantity.

impact of tax


The case for government intervention:

  • to provide public goods
  • to provide merit goods 
  • to  reduce  the  demand  for  demerit goods 
  • to  encourage  positive  externalities and discourage negative externalities
  • to  control/discourage  monopolies  if these work against the public interest
  • to overcome information failure

The case against intervention:

  • intervention may lead to inefficient firms   being   supported   by   the government finance   
  • needed   to   pay   for intervention will need to come from somewhere  and  there  will  be  an opportunity cost involved in terms of the alternative uses that the money could have been put to.
  • nationalisation may put politicians in charge rather experienced/knowledgeable business people

Any Two reasons must be identified along with a brief explanation for each.

  • Government subsidy: a government subsidy will reduce costs of production/provides an incentive to produce more
  • Falls in costs of production : a fall in costs of production means that firms can produce more at the same price
  • Advances in technology: advances in technology lower costs of production
  • Good weather: good weather can increase the supply of agricultural products
  • Seasonal factors: when a crop is in season, the supply increases
  • Reduction in indirect tax: reduction in indirect tax lowers costs of production
  • Changes in the price of other products produced: if the price of one product firms produce falls, they may move resources to this product.











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