CORRECTION RECORD
Unit 1 confirmed corrections
These changes address confirmed errors and inconsistent explanations. Original source documents are preserved. See the evidence correction record for the subsequent review of historical claims.
PED, YED & XED
Before: Unitary (= 1)
Now: Unitary throughout the relevant price range (= 1)
Why: Constant unit elasticity over the price range gives unchanged revenue; unit elasticity at one point alone does not.
Functions of the Price Mechanism
Before: When the price of a product rises, firms have an incentive to shift production towards it, since it generates higher profits.
Now: When the price of a product rises relative to its production costs, firms have an incentive to shift production towards it because supplying it may become more profitable.
Why: A price rise does not necessarily raise profits if costs also rise; makes the stated price-incentive mechanism conditional.
Functions of the Price Mechanism
Before: high price of a good → more profitable to supply → firms increase production.
Now: higher price relative to production costs → greater potential profitability → incentive for firms to increase production.
Why: Repeats the price-profit claim; retains its causal structure with the necessary cost qualification.
Functions of the Price Mechanism
Before: A high price signals to producers that demand is high and that they should increase production.
Now: A high price signals relative scarcity: demand is high relative to available supply. It may encourage producers to increase production where this is profitable and feasible.
Why: High price alone does not identify a demand shift; restricted supply can also explain it. Aligns with block 887.
Functions of the Price Mechanism
Before: The same high price signals to consumers to reduce demand.
Now: The same high price signals to consumers to reduce quantity demanded.
Why: An own-price change affects quantity demanded, not the demand curve; aligns with block 914.
Functions of the Price Mechanism
Before: rising house prices → signals high demand → encourages builders to construct more homes → resources allocated towards housing.
Now: rising house prices → signals housing is becoming scarcer relative to demand → may encourage builders to construct more homes where profitable and feasible → resources allocated towards housing.
Why: Keeps the example but avoids attributing a price rise solely to high demand or guaranteeing a supply response.
Functions of the Price Mechanism
Before: The price mechanism can also be considered in the context of mass markets (the largest group of consumers for a product, e.g. restaurants) and niche markets (a smaller, specific segment, e.g. a particular cuisine like Italian). A niche market is generally better at allocating resources to where consumers want, since it is closer to the consumer and more directly targeted, making the allocation of resources more efficient.
Now: The price mechanism can also be considered in the context of mass markets (the largest group of consumers for a product, e.g. restaurants) and niche markets (a smaller, specific segment, e.g. a particular cuisine like Italian). A niche market may respond closely to particular consumer preferences. It is not necessarily more efficient than a mass market: resource allocation also depends on competition, information, production costs and externalities.
Why: Niche markets are not inherently more allocatively efficient; replace the unconditional ranking with relevant conditions.
Government Intervention in Markets
Before: Encourages green production; raises government revenue; low polluters profit from selling permits
Now: Encourages lower pollution; raises government revenue if permits are auctioned or sold; firms with surplus permits can earn revenue by selling them
Why: Freely allocated permits do not generate initial government revenue. Selling permits yields revenue, not necessarily net profit.
Government Failure
Before: Possible government failure: Distorts the rationing function — price can no longer ration the good to those who value it most. Instead, the good is rationed by queues, waiting lists, or first-come-first-served, which is less efficient because it does not reflect consumers' true willingness to pay, and time spent queuing is unproductive. Also distorts the signalling function — the low price signals to producers that demand is low, causing them to reduce supply, when in fact there is excess demand.
Now: Possible government failure: A binding maximum price prevents price from clearing the market. The shortage may instead be rationed through queues, waiting lists, or first-come-first-served; time spent queuing has an opportunity cost, and allocation may not reflect willingness and ability to pay. The controlled price reduces the incentive to supply, even though there is excess demand. Whether the policy improves access for its intended beneficiaries depends on how the available supply is allocated.
Why: A controlled low price does not signal low demand. Also avoids treating willingness to pay as a complete measure of need or declaring every non-price allocation less efficient.
Government Failure
Before: Possible government failure: Distorts the signalling function — the high price signals to producers that demand is high, causing them to overproduce, when in fact there is excess supply. Also distorts the incentive function — producers are incentivised to overproduce because they receive a guaranteed high price, removing the incentive to be efficient or responsive to actual consumer demand.
Now: Possible government failure: A binding minimum price makes quantity supplied exceed quantity demanded. Producers may wish to supply more at the higher price, but a price floor alone does not guarantee sales or higher total revenue. If the government guarantees to buy surplus output at the support price, producers have a stronger incentive to expand production; this can create fiscal and storage costs and weaken their response to consumer demand.
Why: Distinguishes a legal floor from a guaranteed government purchase scheme; neither sales nor higher producer revenue is assured by the floor alone.
Government Failure
Before: Farmer incomes remain stable
Now: May stabilise farm revenues by reducing price volatility; income still depends on output and costs
Why: Stable prices do not guarantee stable farmer income.
Government Failure
Before: Beneficial in rural areas where farming is the main income
Now: May support rural communities where farming is an important source of income
Why: Keeps the useful potential benefit without treating it as automatic.
Government Failure
Before: Increases consumer welfare by stabilising prices
Now: May protect consumers from sharp price spikes; overall welfare depends on the supported price and the scheme’s costs
Why: Price stabilisation can benefit consumers but a high support price and fiscal costs may offset the gain.
Market Failure
Before: Benefit to the consumer or revenue to the firm
Now: Benefit received by the consumer from consuming the good; the payment to the producer is not an additional social benefit.
Why: Avoid double-counting a payment as a separate social benefit.
Market Failure
Before: Merit and demerit goods: demerit goods (e.g. cigarettes, alcohol) are associated with negative externalities and are over-provided due to information failure — consumers are unaware of the long-run implications. Merit goods (e.g. education, healthcare) are associated with positive externalities and are under-provided for the same reason. Not all goods with externalities are merit or demerit goods.
Now: Merit and demerit goods: consumers may underestimate the long-run private benefits of merit goods, such as education, or the long-run private costs of demerit goods, such as smoking. This information failure can lead to under-consumption or over-consumption. Externalities are a separate issue: education may benefit other people, while second-hand smoke harms bystanders. A good can involve both information failure and externalities, but one does not imply the other.
Why: Separate misperceived private benefits and costs from effects on third parties; align with the existing analysis panel.
Market Failure
Before: The extent to which the market fails involves a value judgement — it is hard to determine the monetary value of an externality (e.g. the cost of pollution), which makes designing government policy difficult.
Now: Estimating the monetary value of an externality, such as pollution damage, can be difficult because the evidence is incomplete or uncertain. This makes it harder to estimate the welfare loss and choose the size of a corrective tax or subsidy. Measurement uncertainty is different from a value judgement: deciding how much weight to give to the interests of different groups or generations involves normative judgement.
Why: Distinguish empirical measurement uncertainty from normative welfare judgements.
Government Intervention in Markets
Before: Consumers are less responsive to the price rise, so producers can pass on most of the tax to consumers without losing many sales
Now: With supply unchanged, less elastic demand means consumers bear a larger share than with more elastic demand. Consumers bear most of the tax only when demand is less elastic than supply.
Why: Tax incidence depends on relative demand and supply elasticities.