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Market Failure

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Submitted By angiejk
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What Determines the Supply for a Good or Service in a Market?
________________________________________________________

Shape of the Supply Curve

It slopes upwards for two reasons:

1) Rising prices provide an incentive for firms to produce higher quantities. 2) Law of Diminishing Returns – production costs are higher as higher quantities are produced so producers need to charge consumers more.

Movement along the Supply Curve

Increased P Increased S : expansion/extension of supply.
Decreased P Decreased S : contraction of supply.

Shifts in the Supply Curve

Shift outwards – increase in supply.
Shift inwards – decrease in supply.

Non price determinants of supply cause shifts:

1) Production Costs – increased costs lead to decreased supply and an inward shift.

2) Technology – new technology leads to increased efficiency and decreased costs of production – outward shift in the S curve.

3) Indirect Taxation – increase production costs and decrease supply – specific tax (fixed amount per unit) and ad valorem tax (percentage of total price e.g. VAT.

Specific Tax: Ad Valorem Tax:

4) Subsidies – decrease costs of production – increase S.

5) Producer Cartels – group together to control P and Q of a good – illegal in the UK. E.g. OPEC (organisation of petroleum exporting countries) can increase or decrease S to control P – HOWEVER only possible to increase supply if there are more reserves.

Price Elasticity of Supply (PES)

PES is the responsiveness of the supply of a good to a change in price. The value of PES is usually positive.

%∆QS%∆P

* If PES > 1 the good is price elastic. * If PES < 1 the good is price inelastic. * If PES = 1 the good is unit elastic. * If PES = 0

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