05. Supply

Question 1

What is supply?

Answer 1

Supply is defined as the quantity of a good or service that producers are willing and able to produce for the market at a given price.

Question 2

Explain the law of supply.

Answer 2

The Law of Supply states that as the price of a product rises, the quantity supplied of the product will rise, ceteris paribus.

Question 3

What are the price determinants of supply?

Answer 3

(ROTTEN)
1) Resource Cost
2) Other goods/Related goods
3) Taxes/Tariffs (government intervention)
4) Technological Change
5) Expectation of Future Prices
6) Natural Conditions

Question 4

Resource Cost

Answer 4

• If there is an increase in the cost of a factor of production this will increase a firm’s cost. This means that they can supply less.
• A rise in the level of wages in a textile firm means that they will supply fewer textiles at all price levels.

Question 5

Other goods / Related goods

Answer 5

A) Competitive supply
- Often producers have a choice of what to produce because factors of production under their control are able to produce multiple products with minimal disruption.
B) Joint supply
- When one good is produced another is produced at the same time. We might call it a by-product of the other.
- If there is an increase in price of petrol, there will be an increase in the supply of diesel cars as it is in joint supply with petrol.

Question 6

Taxes / Tariffs (government intervention)

Answer 6

• Taxes will increase the cost of production and therefore shift the supply curve leftwards.
• Subsidies are the opposite of taxes.

Question 7

Technological Change

Answer 7

• Improvements to the state of technology in a firm or industry should lead to an increase in supply as it makes production more efficient, thus lowering the cost of production.

Question 8

Expectation of Future Prices

Answer 8

A) - Producers who expect that demand will increase in the future may start to supply more assuming that higher demand will lead to higher prices.

B) - If the market research suggests that demand is likely to fall in the future, producers will be likely to reduce their supply of the product.

Question 9

Natural conditions.

Answer 9

• Hurricanes, floods, and droughts will reduce supply of most goods, shifting the line to the left.
• Favourable weather will increase the supply of agricultural goods.