1.2.2 supply

Question 1

Changes in costs of production

Answer 1

If the cost of making a product changes, the amount that a business is
willing to supply will adjust accordingly:
• If production costs rise, the amount supplied will fall.
• If production costs fall, the amount supplied will rise. Higher unit costs cause an inward shift of supply e.g. a rise in wage rates or an increase in energy prices / other raw materials

Question 2

Introduction of new technology

Answer 2

New technology used in production, such as industrial robots, tends to
reduce the costs of production:
• The introduction of new technology should lead to an increase in supply
• Firms willing to supply more with lower production costs offering
higher protits

Question 3

Indirect taxes

Answer 3

Indirect taxes are taxes that
the government imposes
on goods and services, for
example VAT. • An increase in indirect tax rates will increase cost and therefore
reduce supply.
• A decrease in indirect tax rates will cut total costs and therefore
increase supply.

Question 4

Government subsidies

Answer 4

These are the opposite of taxes. When the government wants to
encourage the supply of a product such as wind-powered energy, it may
offer subsidies to businesses. This cuts the cost of production faced by the
business, meaning that subsidies will increase supply.

Question 5

External shocks

Answer 5

Unexpected events such as economic crises, poor harvests or natural
disasters can reduce the total quantity of an item available. This would
lead to an increase in the price of the item, meaning that production costs
rise and firms reduce the amount they are willing to supply.

Question 6

Supply definition

Answer 6

Supply is the quantity of a good or service that a producer is willing and able to supply onto the market at a given price in a given time period.

Question 7

The basic law of supply

Answer 7

The basic law of supply is that as the selling price of a product rises, so businesses expand supply to the market. The higher selling price acts as an incentive for businesses to produce more – and it may also attract other suppliers into the market.

Question 8

Higher unit costs on supply example

Answer 8

For example, consider businesses that makes food products that contain a substantial amount of wheat. Falling wheat prices will cause a reduction in the resource costs for food manufacturers such as cereal producers. If other factors remain constant, producers who use wheat will be able to supply more for the same cost.