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Restore market

Restore market. When Price has increased: After shift to S1 if Price continues to stay at ‘P ’, it will lead to a decrease in QS and increase in QD. This leads to shortage (Excess Demand). Consumers will bid prices up.

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Restore market

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  1. Restore market When Price has increased: • After shift to S1 if Price continues to stay at ‘P’, it will lead to a decrease in QS and increase in QD. • This leads to shortage (Excess Demand). • Consumers will bid prices up. • This then leads to Increase in QS (law of Supply) and decrease in QD (law of Demand). • This continues until New Equilibrium is reached and market restored.

  2. Restore market When Price has decreased: • After shift to S1 if Price continues to stay at ‘P’, it will lead to an increase in QS and decrease in QD. • This leads to surplus (Excess Supply). • Producers will drop prices down. • This then leads to decrease in QS (law of Supply) and increase in QD (law of Demand). • This continues until Market is cleared. • New Equilibrium is reached and market restored.

  3. CONSUMER,PRODUCER SURPLUS AND DWL • CS & PS must be always shown in total $Dollar value NOT price. • It is area of TRIANGLE not Price. • After Govt intervention, CS & PS lost or gained is NOT received by GOVT – that’s why we call it DWL – no one gets it. • Inefficiency – 3 points to remember: a) CS – PS NOT maximised b) CS-PS lost is not gained by anyone c) happens when there is outside interference in market

  4. FISCAL; MONETARY • FISCAL: Govt revenue and expnditure decisions to influence economy • MONETARY: Control money supply, RBNZ and Interest rates • EXPANSIONARY MONETARY: Increase money supply, so lower OCR and Interest rate • CONTRACTIONARY FISCAL: Promote withdrawl from circular flow – either increase Revenue or reduce Spending

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