ANALYSIS CHAIN

How does an increase in demand affect a market?

Demand increases → demand shifts right → equilibrium price rises → equilibrium quantity rises → producer revenue may rise depending on PED.

How does a decrease in demand affect a market?

Demand decreases → demand shifts left → equilibrium price falls → equilibrium quantity falls → firm revenue may fall.

How does an increase in supply affect a market?

Supply increases → supply shifts right → equilibrium price falls → equilibrium quantity rises → consumer welfare increases.

How does a decrease in supply affect a market?

Supply decreases → supply shifts left → equilibrium price rises → equilibrium quantity falls.

How does a rise in income affect normal goods?

Income rises → demand for normal goods rises → demand shifts right → quantity demanded increases.

How does a rise in income affect inferior goods?

Income rises → demand for inferior goods falls → demand shifts left → quantity demanded falls.

How does a rise in the price of a substitute affect demand?

Price of substitute rises → consumers switch products → demand increases → demand shifts right.

How does a rise in the price of a complement affect demand?

Price of complement rises → joint consumption falls → demand falls → demand shifts left.

How does PED affect total revenue?

If demand is elastic → price rise causes revenue to fall. If demand is inelastic → price rise causes revenue to rise.

How does an indirect tax affect consumers and firms?

Indirect tax imposed → production costs rise → supply shifts left → price rises → quantity falls → consumer surplus falls → producer surplus falls.

How does a subsidy affect a market?

Subsidy reduces production costs → supply shifts right → price falls → quantity rises → consumer welfare increases.

How does a maximum price affect a market?

Maximum price below equilibrium → quantity demanded exceeds quantity supplied → shortage develops.

How does a minimum price affect a market?

Minimum price above equilibrium → quantity supplied exceeds quantity demanded → surplus develops.

How do negative externalities in consumption cause market failure?

External costs ignored → MSC exceeds MPC → overconsumption occurs → welfare loss created.

How do positive externalities in consumption cause market failure?

External benefits ignored → MSB exceeds MPB → underconsumption occurs → market failure.

How do negative externalities in production cause market failure?

External costs ignored → MSC exceeds MPC → overproduction occurs → resources misallocated.

How do positive externalities in production cause market failure?

External benefits ignored → MSB exceeds MPB → underproduction occurs → welfare loss created.

How do merit goods cause market failure?

Consumers underestimate benefits → demand too low → underconsumption occurs.

How do demerit goods cause market failure?

Consumers underestimate costs → demand too high → overconsumption occurs.

How do public goods create market failure?

Free rider problem occurs → firms cannot charge consumers → good underprovided.

How can government intervention reduce market failure?

Taxes/subsidies/regulation introduced → resource allocation improves → welfare loss reduced.

How does information failure lead to market failure?

Consumers lack information → poor decisions made → resources misallocated.