1.2.4 Supply Flashcards
Supply
The ability and the willingness to provide a good or service at a particular price at a given moment in time.
Movements along a supply curve
Caused by change in price:
Contraction in supply - quantity supplied falls because of a decrease in price
Extension in supply - quantity supplied rises because of an increase in price
Shifts of supply curve
Decrease in supply (shift left) - fewer goods are supplied at each and every price
Increase in supply (shift right) - more goods are supplied at each and every price
Conditions of supply
Costs of production
Price of other goods
Weather
Technology
Goals of the supplier
Government legislation
Taxes and subsidies
Producer cartels
Costs of production - conditions of supply
If a business has in an increase in their costs but their selling price stays the same, they will make less money on what they sell. They will put up their prices in order to avoid making a loss and so less is supplied at each price, meaning the supply curve will shift to the left. If they have a decrease in their costs, then it will shift to the right.
Price of other goods - conditions of supply
Joint supply is where the production of one good automatically causes the production of another good e.g. the production of beef automatically produces leather. Therefore, if the price of beef rises, farmers will slaughter their cows and so will get more leather, causing a shift to the right and an increase in supply.
Competitive supply is where the production of one good prevents the supply of another e.g. if the farmer kills his cows, he can no longer produce the milk. Therefore, the rise in the price of beef may cause a decrease in the supply of milk and a shift to the left.
Weather - conditions of supply
For some goods, particularly agricultural goods, the supply is dependent on weather e.g. if the weather is good, more wheat will be produced so the curve will shift to the right.
If the weather is bad, the producers won’t be able to supply as much wheat and so it will shift to the left.
Technology - conditions of supply
If new technology is introduced then it will lead to a fall in production costs as there is higher productive efficiency. This will encourage firms to lower prices or produce more goods for the same price and so the curve will shift to the right.
- Eval: During war or natural disasters, companies may have to use less efficient technology so the supply curve will shift to the left as they produce less at each price.
Goals of the supplier - conditions of supply
If a supplier is motivated by helping society and providing a service, they may increase supply even when that doesn’t provide extra profit.
Government legislation - conditions of supply
If the government passes laws that mean more cars have to have catalytic converters, supply of cars with catalytic converters will increase.
High levels of regulation may increase costs and so decrease supply.
Eval: Catalytic converters are devices fitted to vehicle exhausts to reduce the amount of dangerous gases emitted. They are often targeted by thieves as they contain valuable metals e.g. platinum and can be removed in less than a minute. Catalytic converter theft most frequently occurs in car parks, but they can happen anywhere.
Taxes and subsidies - conditions of supply
A tax decreases supply and a subsidy increases supply by affecting the costs of production.
Producer cartel - conditions of supply
Some firms or countries come together in order to decrease supply and therefore increase the price of their good to increase profit.
Why supply curve is upward sloping
• If prices are higher, firms will increase production to take advantage of the high profits they can make. If prices are lower, firms will cut back on any unprofitable production and so supply will decrease.
• Higher prices will encourage new firms to enter, because it seems more profitable, and so output will increase.
• To increase production, you will need to use up more resources which will cost more and the only way that you will want to do this is if you are going to receive more money. This assumes that the cost of producing a unit increases as output increases (rising marginal cost).
