1.2.4 Supply Flashcards
What is supply
Supply is the quantity of a good or service that a producer is willing and able to supply at a given price over a period of time.
Why are supply curves upward sloping?
> If prices are higher, it is more profitable for firms to supply the good, so supply increases.
High prices encourage new firms to enter the market because it seems profitable, so supply increases.
With larger outputs, costs increase, so they will charge a higher price to cover costs. This assumes that the cost of producing a unit increases as as output increases (rising marginal cost).
Movements of Supply
> A movement is caused by a change in the price of a good.
(Diagram sheet 1) A movement from A to B is a contraction in supply, the quantity supplied falls due to a decrease in price. A movement from A to C is an extension in supply, the quantity supplied rises due to an increase in price.
This is based on the assumption that firms are motivated to produce by profit.
Shifts in Supply
> A shift of the supply curve is caused by a change in any of the factors that affect supply, the conditions of supply.
A shift from s1 to s2 is a decrease in supply, because fewer goods are supplied at each and every price.
A shift from s1 to s3 is an increase in supply, as more goods are supplied at each and every price.
Diagram sheet 1
Conditions of Supply
> Costs of production - If a business has an increase in costs they will make less money on what they sell. They will therefore put up their prices, so less is supplied at each price, shifting supply left. If costs decrease it will shift right.
Price of other goods - Joint supply is when the production of one good automatically causes the production of other goods, so if the price of one good rises, more of the other will be supplied, shifting the curve to the right. Competitive supply is where the production of one good prevents the supply of another, so the rise in price of this good will shift the curve left.
Technology - If there is new technology it can lead to higher productive efficiency. This will encourage firms to lower prices, shifting the curve right. War or natural disasters can destroy technology, shifting supply left.
Weather - For some goods supply is dependant on weather, so if it is good supply will shift right, but if bad it will go left.
Goals of the supplier - if the supplier is more interested in providing a service than making a profit, they may increase supply without increasing price.
Government legislation - regulation can increase costs, therefore decreasing supply.
Productivity - higher productivity causes an outward shift in supply, because it lowers average costs.
Taxes and subsidies - tax decreases supply, subsidy increases due to their effect on costs of production.
