1.2.4 Supply

Question 1

What is supply?

Answer 1

Supply is the amount of a good/service that a producer is willing and able to supply at a given price in a given time period

Question 2

What does the supply curve show?

Answer 2

The supply curve shows the relationship between price and quantity supplied

Question 3

Why does the supply curve slope upwards from left to right?

Answer 3

The supply curve slopes upwards from left to right because there is a positive relationship between price and quantity supplied.
- Rational profit maximising producers would want to supply more as prices increase in order to maximise their profits

Question 4

What causes movements along the supply curve?

Answer 4

• If price is the only factor that changes (ceteris paribus), there will be a change in the quantity supplied (QS)
• A fall in the price of a good results in a fall in quantity supplied, we call this a contraction in QS
• An increase in price causes an increase in the quantity supplied, we call this an extension in QS

Question 5

What causes a shift in the supply curve?

Answer 5

A shift in the supply curve is caused by a change in any non-price determinant of supply. The curve can shift left or right.

Question 6

What are 5 of the main conditions of supply?

Answer 6

• Costs of Production (COPs)
• Indirect Taxes
• Subsidies
• New Technology
• Change in the number of firms in the industry

Question 7

Explain how an increase in COPs will shift supply. Do the same for a decrease in COPs.

Answer 7

• If the price of raw materials or other COPs increases, firms will respond by reducing their supply, and therefore supply will shift to the left.
• If the price of raw materials or other COPs decreases, firms will respond by increasing their supply, and therefore supply will shift to the right.

Question 8

Explain how an increase in indirect taxes will shift supply. Do the same for a decrease in indirect taxes.

Answer 8

• An increase in specific or ad valorem taxes will increase the costs of production for firms, therefore they will reduce supply and the supply curve will shift to the left.
• A decrease in specific or ad valorem taxes will decrease the costs of of production for firms, therefore they will increase supply and the supply curve will shift to the right.

Question 9

Explain how an increase in subsidies will shift supply. Do the same for a decrease in subsidies.

Answer 9

• If subsidies increase, costs of production will fall, increasing supply and shifting supply to the right.
• If subsidies decrease, costs of production will increase, increasing supply and shifting supply to the left.

Question 10

Explain how new technology for firms will shift supply. Do the same for ageing technology.

Answer 10

• New technology increases productivity an lowers costs of production for firms. This will increase supply and shift the supply curve to the right.
• Ageing technology reduces productivity for firms. This will reduce supply and shift the supply curve to the left.

Question 11

Explain how an increase in the number of firms in an industry will shift supply. Do the same for how a decrease in the number of firms in an industry will shift supply.

Answer 11

• If new firms enter the market there will be an increase in supply as more firms are producing the product. Therefore supply will shift to the right.
• If firms exit the market and the number of firms decreases there will be less firms producing the same product. As a result supply will shift to the left.