markets

Diagrams for Supply and Demand

Diagrams for Supply and Demand

This is a collection of diagrams for supply and demand. It is mainly for my benefit, so when creating a post, like the price of tea I can easily find a suitable diagram to illustrate what is happening.  Supply Shifts to the leftIn this diagram the supply curve shifts to the left. It leads to a higher price and fall in quantity demand. The supply curve may shift to the left because…

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Scarcity in economics

Scarcity is one of the fundamental issues in economics. The issue of scarcity means we have to decide how and what to produce from limited resources. It means there is a constant opportunity cost involved in making economic decisions. Economics solves the problem of scarcity by placing a higher price on scarce goods. The high price discourages demand and encourages firms to develop alternatives. How does economics solve the problem of scarcity?If we take a good like oil. The reserves of oil are limited; there is a scarcity of the raw…

Monopolistic Competition – definition, diagram and examples

Monopolistic Competition – definition, diagram and examples

Definition: Monopolistic competition is a market structure which combines elements of monopoly and competitive markets. Essentially a monopolistic competitive market is one with freedom of entry and exit, but firms can differentiate their products. Therefore, they have an inelastic demand curve and so they can set prices. However, because there is freedom of entry, supernormal profits will encourage more firms to enter the market leading to normal profits in the long term. A monopolistic competitive industry has the following features:Many firms. Freedom of entry and exit. Firms produce differentiated…

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Government Price Controls

Government price controls are situations where the government sets prices for particular goods and services. This can take various forms such as:Minimum prices – Prices can’t be set lower (but can be set above) Maximum price – Limit to how much prices can be raised (e.g. market rent) Buffer stocks – Where government keep prices within a certain band Limiting price increases – In a privatised monopoly (e.g. electricity, gas, water – where there is no competition) the government regulator may play a role in limiting how much prices…

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Should We Ban Cigarettes?

Readers Question: Using data and your economic knowledge assess the case for and against a government completely banning the sale and consumption of cigarettes. AQA (15) 1. Cigarettes are a demerit good. People underestimate the costs of smoking, e.g. lower life expectancy. It has been suggested that the true cost of a packet of cigarettes is over $200. Therefore, the government is justified to try and stop people consuming goods which harm them. 2. Cigarettes have negative externalities on the rest of society. For example, it creates health problems of…

Market Based Pricing

Market Based Pricing

For many goods we expect the price to be determined by market forces – by supply and demand. For example, computers, cars, holidays, food e.t.c. However, there is another class of good where society dislikes the idea of prices being set by market forces. The best example is football tickets or Concert tickets. A few years ago, Manchester United (and other clubs) had a long waiting list for a season ticket. Demand was greater than supply. Market based pricing would have pushed up the price of a season ticket until there…

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Police and Fire Services as Public Goods

Q. Use economics and political theory to explain why the fire and rescue service should be provided by the state. I don’t want the answer….I just don’t understand what this means. This revolves around a fundamental debate in economics – How much should the government intervene in the economy? Ideally, goods and services would be provided in a free market without requiring any government intervention. Market provision is considered superior because there is less bureaucracy and more incentives for firms to be efficient. However, there are some goods and services which will…

Explaining Supply and Demand

Explaining Supply and Demand

Supply and demand are a fundamental basis of economics, they help explain the determination of price and output in different markets. The laws of supply and demand suggest that a free market will respond to changes in demand and supply to overcome shortages and surplus and maintain an ‘equilibrium price’. For example, a shortage of diamonds leads to a higher price. If demand for diamonds increased, this would put upward pressure on prices to prevent a shortage.Readers Question Could you explain the above…