1.2.2 - Supply

Question 1

What is supply

Answer 1

Supply is measured in terms of the quantity of a good or service that a producer is willing and able to make available on the market, at a given price, over a given period of time

Question 2

How does price lead to a change in supply

Answer 2

• Price and supply are related
• As a price paid by customers increases on a product or service, normally, a business will want to supply more, in anticipation of higher profits

Question 3

How does change in the cost of production lead to a change in supply

Answer 3

• If the costs of production increases e.g. due to a rise in the cost of raw materials or due to a rise in the minimum wage:
• The business may decide to produce less
• Prices may have to go up
• The product will have lower sales and therefore lower revenue

Question 3

How does introduction of new technology lead to a change in supply

Answer 3

• New technology means that more goods can be supplied :
• Mechanization and automation of production processes means supply can increase
• Mass production methods improved to increase capacity
• Using new technology means that costs can be reduced and that means that they can offer lower prices to the customer to drive up demand

Question 4

How does indirect tax lead to a change in supply

Answer 4

• When the government increases tax on goods such as petrol then supply will decrease
• VAT / Customs tax / Excise tax are all indirect taxes and when applied to goods it makes supplying them less attractive. This can lead to a decrease in supply

Question 5

How does government subsides lead to a change in supply

Answer 5

• This is a payment from the government to encourage more suppliers to enter the market and to supply more. With a subsidy there is an increase in supply because costs have been lowered thanks to the subsidy
• For example the Government pays subsidies to wind farm manufacturers to erect turbines offshore in the UK. This adds about £18 a year to a UK householder’s energy bill

Question 6

How does external shocks lead to a change in supply

Answer 6

• External shocks may mean that the business may not want to supply at current levels, these shocks may be:
• Changes in oil price which can affect transport costs
• War, a business may not want to supply goods to a country which is at war
• Weather problems ; particularly for crops
• Changes in labor laws (e.g. length of working week or minimum wage)