Understand that higher prices imply higher profits and that this will provide the incentive to expand production
When the price of a good rises, firms earn more profit on each unit they sell. That extra profit motivates them to produce and sell more of the good.
Formula
Profit per unit = Price − Average Cost
Real World
When egg prices surged in the UK in 2023 following the avian flu outbreak, many farmers invested in expanding their flocks to capitalise on the higher profit margins per box sold.
Exam Focus
Link price → profit → incentive to expand in a chain: each arrow must be explicitly explained to earn all analysis marks.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
How well did you know this?