2.2 SUPPLY

Question 1

define supply

Answer 1

supply is the amount of good or service firms are willing and able to produce in a given MARKET, at a given PRICE, in a given TIME PERIOD

Question 2

what is the law of supply

Answer 2

states that, as the price of a product increases (ceteris paribus), the quantity supplied of it will also increase

Question 3

what are the assumptions underlying the law of supply

Answer 3

1 profit maximisation

#2 rising marginal costs (law of diminishing returns)

Question 4

explain profit maximisation

Answer 4

1. price of product increases
2. so firms are able to earn more revenue and profit from selling this product
3. firms r more willing to supply this product

Question 5

explain rising marginal costs linking to supply

Answer 5

1. firms increase their output
2. at one point it becomes inefficient as they run out of land/resources
3. so it becomes increasingly expensive to produce the product
4. so TO COMPENSATE for the rising marginal costs, firms need higher prices to make them more willing and able to produce more of the product

Question 6

what does change in price do to the supply curve

Answer 6

movement along the S curve

Question 7

what is the relation between individual supply and market supply

Answer 7

total market supply = sum of all individual producer supplies

Question 8

what are non price determinants of supply

Answer 8

factors other than the price of the product that affect the amount of it firms are willing and able to produce, assuming ceteris paribus

Question 9

examples of non price determinants of supply

Answer 9

• changes in costs of FoPs
• changes in indirect taxes and subsidies
• changes in price of related goods
• number of firms
• change in technology
• supply side shocks (eg. weather)
• future price expectations

Question 10

how does supply curve shift

Answer 10

increase = shift to right
decrease = shift to left

Question 11

competitive supply vs substitutes

Answer 11

• competitive supply: products PRODUCED in place of eachother using the same FoPs (eg. Tvs and and ipads)
• substitute: products CONSUMED in place of eachother (eg. coke and lemonade)
• usually concerns demand not supply

Question 12

joint supply vs complements

Answer 12

joint supply: products that are PRODUCED together (eg, beef and leather)

complements: products CONSUMED together (eg. iphones and apps)
- concerns demand more than supply