2.2 - Supply Theory

Question 1

Define supply

Answer 1

Supply is the willingness and ability of producers to offer a given quantity of a good for sale at a given point in time at a given price.

Question 2

State the law of supply

Answer 2

There is a positive relationship between the price of a good and the quantity demanded for it.

Question 3

List the non-price determinants of supply

Answer 3

• Cost of factors of production
• Competitive supply
• Joint supply
• Technology
• Supply-side shocks
• Price expectations
• Number of producers in the market
• Taxes
• Subsidies

Question 4

Elaborate on costs of factors of production as a non-price determinant of supply

Answer 4

A decrease in the costs of factors of production would lead to an increase in supply

Question 5

Elaborate on competitive supply as a non-price determinant of supply

Answer 5

Many firms produce a range of goods, and a change in the supply of one good a firms sells may affect the quantity supplied of other products they sell.

Question 6

Elaborate on joint supply as a non-price determinant of supply

Answer 6

When a production process yields two or more goods at the same time.

Question 7

Elaborate on technology as a non-price determinant of supply

Answer 7

As technology in the production process advances, the production capacity of firms increases.

Question 8

Elaborate on supply-side shocks as a non-price determinant of supply

Answer 8

A country or region may experience supply-side shocks which lead to a decrease in supply.

Question 9

Elaborate on price expectations as a non-price determinant of supply

Answer 9

Producer supply decisions can be affected by their expectations of what may happen to the price of a good or service in the future.

If producers expect prices to decrease, they may increase supply in the present and vice versa.

Question 10

Elaborate on number of producers in a market as a non-price determinant of supply

Answer 10

As firms enter a market, the supply in the market increases.

Question 11

Elaborate on taxes as a non-price determinant of supply

Answer 11

When indirect taxes are levied on goods and services supply decreases as a tax adds to a firm’s costs of production.

Question 12

Elaborate on subsidies as a non-price determinant of supply

Answer 12

A subsidy on a good or service leads to an increase in supply as the cost of production decreases.