2.3 Supply

Question 1

What is supply?

Answer 1

The ability and willingness of firms to provide goods and services at each price in a given time period

Question 2

Explain the law of supply

Answer 2

As the price rises, the quantity supplied rises and as the price falls, the quantity supplied falls

Question 3

Why does the law of supply come about?

Answer 3

the law of supply comes about because:

• firms are likely to gain higher profits by supplying more
• production costs are likely to increase as more is produced, meaning higher prices are needed to cover the extra production costs
• new firms may be attracted to the market because of the higher prices which mean they can cover their higher costs of production

Question 4

What is meant by individual supply?

Answer 4

the supply of a good or service by an individual producer

Question 5

What is meant by market supply?

Answer 5

the total supply of a good or service, found by adding together all the individual producer’s supply

Question 6

What are movements along the supply curve caused by?

Answer 6

A change in price

Question 7

What are shifts of the supply curve caused by?

Answer 7

Non-price factors only

Question 8

What are the 6 causes of shifts of the supply curve?

Answer 8

-costs of production: producers supply less when production costs increase
-taxes and subsidies: increase in tax such as VAT would lead to a rise in costs and thus a fall in quantity. a subsidy to a firm would allow more to be supplied
-tech: intro of new or improved tech can reduce production costs and/or increase the amount that can be produced
-climate: in agriculture, changes in the weather can affect how much farmers can supply each year
-increase in producers or size of firms: both will lead to an increase in quantity supplied and a rightward shift of the supply curve.
gov regulations: intro of new gov regulations such as health and safety and minimum wage will increase production costs for firms, leading to a leftward shift of the supply curve

Question 9

What are the 5 consequences of a shift of the supply curve?

Answer 9

• economies of scale: could lead to greater profits or lower prices for consumers, or both.
• efficiency: being able to produce more with the same resources leads to greater efficiency and greater productivity.
• sales: if price falls then consumers are likely to buy more leading to an increase in profits
• exports: all of the above make a firm more competitive and increase its ability to export successfully
• monopoly: if a firm becomes more competitive than its rivals then it is able to drive them out of the market, leading to an establishment of a monopoly.

Question 10

What are the consequences of movements along the supply curve?

Answer 10

a movement along the supply curve results in price and quantity moving in the same direction

Question 11

What is an expansion of supply?

Answer 11

when a movement up the supply curve occurs

Question 12

What is a contraction of supply?

Answer 12

When a movement down the supply curve occurs

Question 13

What is meant by price elasticity of supply?

Answer 13

it refers to the responsiveness of quantity supplied to a change of price of the product

Question 14

When is supply price elastic?

Answer 14

When a change in price leads to a larger change in quantity

Question 15

When is supply inelastic?

Answer 15

When a change in supply leads to a smaller change in quantity

Question 16

What value does elastic supply have?

Answer 16

Between 1 and infinity

Question 17

What value does inelastic supply have?

Answer 17

between 0 and 1

Question 18

When is supply unitary elastic?

Answer 18

when a change in quantity is equal to a change in price. it has the value 1

Question 19

What are the importance of price elasticity on consumers?

Answer 19

• if the products the consumers are buying are inelastic, then they are likely to face higher prices in order to buy them
• if the product they buy has a very inelastic supply, then they may not be able to get more because the quantity is fixed e.g. seats in a stadium or cinema.
• if the product they buy has elastic supply then its quite easy to purchase more

Question 20

What are the importance of price elasticity to producers?

Answer 20

-firms would prefer to have an elastic PES as its easier to respond to price changes
-more elastic supply allows firms to be more flexible in what they offer to consumers
-very inelastic supply means that prices will depend entirely on demand
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Question 21

How can firms increase their elasticity?

Answer 21

• upgrading to the latest tech
• creating spare capacity
• improving storage methods to prolong the life of a product
• keeping large amounts of stock