1.2.4 - Supply

Question 1

Define Supply

Answer 1

.The quantity of goods that sellers are prepared to sell at any given price over a period of time

Question 2

What causes movement along the supply curve?

Answer 2

Price

Question 3

How does price cause movement along the supply curve?

Answer 3

HIGHER PRICES:

. If a price of good increase, they will be extension in supply

. Firms want to take advantage of the higher prices and make higher profits

LOWER PRICES:

. A fall in price will lead to a contraction in supply.

. Firms will cut back on relatively unprofitable production, whilst others will stop producing altogether

. Some firms may go out of business, unable to cover their costs of production from the price received.

Question 4

Law of Supply

Answer 4

. There is a direct relationship between supply and price

. As price increase, quantity supplied increases.

. This is due to profit motive

Question 5

Define Conditions of Supply

Answer 5

Factors that cause a SHIFT in supply

. This means that price is NOT a condition of supply

Question 6

Why is supply upward sloping?

Why is there an direct relationship between quantity supplied and

Answer 6

. Firms are motivated by profit ⁠— An increase in price will lead to an increase in quantity supplied, as firms want to make more profit

. Cost of production increases as quantity supplied increases (Rising Marginal Cost ) ⁠— To cover costs of production (e.g. land, labour and capital) after a increase in quantity supplied, firms have to increase their price of goods

Question 7

KEY THING TO REMEMBER ON SUPPLY AND DEMAND DIAGRAM

Answer 7

• If required to draw a diagram with BOTH supply and demand:

. Label the X - axis generally as ‘quantity’. NOT quantity demanded or quantity supplied

Question 8

What do most of the conditions on supply (factors that cause shift in supply curve) affect?

Answer 8

. THE COSTS OF PRODUCTION

. The cost of production influences the willingness and ability to supply at a given price

. If cost of production are lower, then firms are willing to supply more at the same price.

. A reduction in cost of production shifts the supply curve to right and downwards

. An increase in costs of production shifts the supply curve to the left and upwards

Question 9

What are the conditions of supply?

Answer 9

. Productivity
. Indirect Taxes
. Number of firms
. Technology
. Subsidy
. Weather
. (other) Cost of Production

• Remember PINTS WC
• Remember to refer to diagram in exam (e.g. increased productivity shifts supply from S1 to S2)

Question 10

Explain Productivity (condition of supply)

Answer 10

. Labour productivity is the output per worker per hour

. If labour productivity increase, more output is being produced per worker with no increase in cost for the firm.

. This therefore, reduces cost of production for firms increasing their willingness and ability to supply

. Increased productivity, shifts the supply to the right from S1 to S2

Question 11

Explain Indirect Taxes (condition of supply)

Answer 11

. If indirect taxes are imposed, the cost of production for a firm will increase, reducing the willingness and ability to supply.

.This shifts the supply curve to the left and upwards

• The vertical distance between the two supply curves is the value of tax

Question 12

Explain Number of Firms (condition of supply)

Answer 12

. If there is an increase in the number of firms in the market perhaps due to lower barriers to entry, the total supply in the market increases with supply shifting from S1 to S2

Question 13

Explain Subsidies (condition of supply)

Answer 13

. A subsidy is a money grant given to producers to reduce their costs of production and to encourage an increase in output

. If subsidies are imposed, costs of production will decrease, which will increase their willingness and ability to supply, shifting the supply curve to the right and downwards from S1 to S2.

. Vertical distance between two supply curves is the value of the subsidy

Question 14

Explain Weather (condition of supply)

Answer 14

. Good weather (e.g. sunshine and rainfall ) will improve harvest levels for agricultural producers increasing their ability to supply more thus shifting the supply curve to the right

Question 15

Explain (other) Costs of production (condition of supply)

Answer 15

. Other costs of production includes wages, raw materials, transport costs, regulation, gas and electricity.

. If any of these factors decrease, the costs of production for firms increase, shifting the curve to the right and downwards

Question 16

Explain Technology (condition of supply)

Answer 16

. An improvement in technology for a firm (e.g. new machinery or IT) will improve the PRODUCTIVE EFFIENCY of a business operation and reduce costs or production

. This will increase the willingness and ability for a business to supply, shifting the supply curve to the right and downwards

Question 17

Which two conditions of supply does not affect cost of production?

Answer 17

. Weather

. Number of firms

• Try not to include these two in test, unless necessary