The lesson
Explain the theme concept, then apply key diagram analysis. Use this page as a fast, high-quality revision pass—not a wall of notes to memorise.
Demand, supply and price elasticity
Markets clear where demand equals supply. Elasticities measure the responsiveness of consumers and producers to changes in price, income, or related goods.
- Consumer surplus is the difference between what consumers are willing to pay and the market price.
- PED is key for pricing: if demand is inelastic, raising prices increases total revenue.
- Indirect taxes shift supply left, raising consumer price and sharing the tax burden based on elasticities.
Why markets fail
Market failure occurs when the price mechanism leads to an inefficient allocation of resources. Externalities, public goods, and asymmetric information require government intervention.
- Negative externalities in production (e.g. pollution) mean social cost exceeds private cost.
- Public goods are non-rival and non-excludable, leading to the free-rider problem where private firms won’t supply them.
- Government policies like taxation, subsidies, and regulation aim to correct market failure but can cause government failure.
Worked exam thinking
Worked example: consumer surplus
Prompt: An indirect tax is placed on a good. What is the impact on consumer surplus?
How to turn knowledge into marks
Use this answer route
For a focused explanation or short evaluation question on this topic:
- 1Provide exact definitions.
- 2Explain the causal micro or macro mechanism.
- 3Utilise diagrammatic analysis.
- 4Conclude with a key evaluative point.
Quick questions
Check your understanding
What is a public good?
A good that is non-rival (consumption by one doesn’t reduce availability to others) and non-excludable (non-payers can’t be prevented from using it).
How do externalities cause market failure?
They lead to over-consumption/production of negative externalities and under-consumption/production of positive externalities.
What is government failure?
When government intervention leads to a net welfare loss or an even less efficient allocation of resources.