1.2 - Supply

Question 1

What is supply?

Answer 1

Supply is the ability and willingness of a firm to provide a good/service at a given price in a given moment in time

Question 2

Why is supply upward sloping?

Answer 2

• positive relationship between price and quantity supplied
  > rational profit maximising producers would want to supply more as prices increase in order to maximise profits.
  > Higher prices encourages new firms to enter, because the market seems more profitable so supply increases
  > Increasing output increases costs of production, firms are only willing to do so if they receive revenue for this so price increases as qs increases - assumes cost of producing a unit increases as output increases (rising marginal costs)

Question 3

What causes a movement in the supply curve?

Answer 3

• A change in price
  > An increase in price causes an extension in quantity supplied
  > A decrease in price causes a contraction in quantity supplied

Question 4

What causes a shift in the supply curve?

Answer 4

• Conditions of supply cause a supply curve to shift left (qs decreases) or shift right (qs decreases)

Question 5

What are the conditions of supply?

Answer 5

• Costs of production
  > if costs of production (eg: raw materials) increases, firms respond by decreasing quantity of supply (supply curve shifts left)
• Indirect taxes + subsidies
  > Taxes decrease supply by increasing costs of production
  > Subsidies increase supply by decreasing costs of production
• Technology
  > New technology increases productive efficiency which lowers costs of production
  > Can either encourage firms to lower price (leading to extension in demand) or produce more goods at the same price causing a rightward shift in supply curve.
• Number of firms in industry
  > Entry and exit of firms has a direct impact on supply
  > If more firms enter the market supply increases and shifts to the right.
• Weather
  > In some goods (eg: agricultural goods) supply is dependent on weather
• Price of other goods
  > joint supply means production of one good increases production in another good.
  if price of one good rises it increases supply of that good and therefore the other. - supply shifts right
  > competitive supply means the production of one good prevents the production of another good
  if price of one good rises it increases the supply of that good and so decreases the supply of the other. - supply shifts left
• Producer cartels
  > firms may come together in order to decrease the supply of the good and increase price, increasing their profits
• Government legislation
  > If certain goods become legal requirement then supply will increase
  > However high levels of regulations increases costs which could decrease a firms supply