What does a profitable price do?
Attracts producers to supply a market
What sets the market price?
Combination of demand and supply interacting in a competitive market
What do the demand and supply curves have to do in order to have a market?
The curves have to intersect (cross)
What else does the point at which the demand and supply curves cross show? [2]
- Equilibrium price
- Equilibrium quantity
How can we tell from the graph whether there is a functioning market? [2]
- If the demand and supply curves don’t cross
- The curves aren’t guaranteed to cross
When does excess supply occur?
When the quantity supplied is greater than the quantity demanded
What usually causes excess supply to occur?
- Setting a price that is too high to attract customers to buy the quantity suppliers are offering
When does excess demand occur? [2]
- When the quantity demanded outstrips the quantity supplied
- Shortage of the product
How do we restore equilibrium in the case of excess demand?
Raising the price of the product will cause customers to buy less
What is market clearing?
Getting a balance between quantity supplied and quantity demanded, usually arriving at the equilibrium price
What does a change in supply cause? [2]
- A shift of the supply curve
- A new equilibrium price
What should an increase in supply lead to? [2]
- A fall in price
- A rise in quantity
What should a fall in supply bring? [2]
- A rise in price
- A fall in quantity
What should an increase in demand lead to?
An increase in price
What should a decrease in demand lead to?
A reduction in price
What is the profit signalling mechanism? [2]
- Potential profits will attract entrepreneurs to a growing market
- Losses will lead businesses to leave the market
What can trigger the profit signalling mechanism?
When equilibrium price changes because demand has changed
A price increase when demand increases is likely to increase/produce…
Profit
Whenever a price changes, there must be a change in… [3]
- Demand
- Supply
- Both
Why do some prices stay unchanged for a long time? [2]
- Suppliers are likely to be choosing stability
- They absorb any cost change
Explain ceteris paribus
- Looking at only one variable at a time
- Avoids complications
- Allows the examination of individual changes
What is one main assumption about supplying businesses?
That they’re just motivated by profit
What did OFGEM do?
Set a maximum price to protect consumers
