2.3 Supply Flashcards
Define ‘supply’
the various quantities of a good or service a firm is willing and able to produce and supply at different possible prices during a particular time period, ceteris paribus
What is the law of supply?
there is a positive relationship between price and quantity supplied over a particular time period, ceteris paribus:
- as the price of a good increases, quantity supplied increases, ceteris paribus
- as the price of a good decreases, quantity supplied decreases, ceteris paribus
Define ‘market supply’
the sum of all individual firms’ supplies for a good which is presented on a supply curve
why can a supply curve be vertical
it shows that a fixed quantity of output is being produced and that even if the price increases, quantity supplied will stay constant. This could be due to a fixed number of resources e.g. theatre seats that can’t be increased over a short period of time. It could also be because there is no possibility of ever producing more of it e.g. original antiques, paintings and sculptures
what are non-price determinants of supply?
variables other than price that can influence supply
what is a rightward shift called and what does it suggest?
indicates that more is supplied for the same given price = increase in supply
what is a leftward shift called and what does it suggest?
indicates that less is supplied for the same given price = decrease in supply
Describe ‘costs of factors of production’ as a determinant
if production costs increase
= decrease in supply (less profitable)
if production costs decrease
= increase in supply (more profitable)
Describe ‘technology’ as a determinant
increase in technology
= increase in supply (more efficient, lowers costs of production, increase in productive capacity)
decrease in technology
= decrease in supply (less efficient, higher costs of production, decrease in productive capacity)
Describe ‘competitive supply’ as a determinant
- when two goods use similar resources/factors of production
A fall in the price of X, increase in supply Y
An increase in the price of X, decrease in supply of Y
Describe ‘joint supply’ as a determinant
- two goods are derived from the same product
Increase in price of X, increase in supply X + Y
Describe ‘future price expectations’ as a determinant
if they think the price of the good will rise in the future
= supply decreases (shift to the left)
if they think the price of the good will decrease in the future
= supply increase (shift to right)
Describe ‘taxes’ as a determinant
tax = supply decreases as the tax adds to production costs and is less profitable at a lower price (shift to left)
no tax = supply increases as it is a fall in production costs (shift to right)
Describe ‘subsidies’ as a determinant
subsidy = supply increases as it is a decrease in production costs (shifts to right)
no subsidy = supply decreases, less profitable at a lower price (shift to left)
Describe ‘number of firms’ as a determinant
increase in number of firms = increase in market supply
decrease in number of firms = decrease in market supply
Describe ‘shocks’ as a determinant
when there is a shock (unpredictable event) e.g. natural disaster
= supply decreases
What is a movement along the curve and when does it occur?
a change in price = change in (quantity) supplied which is shown as a movement on the supply curve
what is the short run
where a firm has at least one fixed input e.g. size of factories/heavy machiney that cannot be easily changed. Unchanging in its quantity and quality. Whereas there are other variable inputs such as labour which can changed easily.
What is a shift along the curve and when does it occur?
change in a non-price determinant = change in (supply) which is shown as a shift of the entire curve
what is the long run
time period where all inputs can be changed and all inputs are variable.
Define ‘total product’
total quantity of output produced by a firm
Define ‘marginal product’
the extra output produced by one additional unit of a variable input (labour in short run)
why does marginal product increase then decrease
it will start to increase at first as an increase in labour will lead to an increase in productivity and therefore output. However, in the short run by adding variable inputs to a fixed input (land), each additional worker will produce less output as there is not enough resources to work with.
What is the law of diminishing marginal returns
as more and more units of a variable input (labour) are added to one or more fixed inputs (land), the marginal product of the variable input increases to a certain point and then decreases
Define ‘total cost’
all costs of production incurred by a firm
Define ‘marginal cost’
the extra or additional cost of producing one more unit of output
Why does marginal cost increase then decrease
marginal costs decrease at first because marginal product increases, which means that as firms hire more labour they are efficiently increasing output, which means they are able to cover costs and become more profitable.
why does marginal cost then start increasing
marginal cost starts increasing because as marginal product decreases, there is an increase in labour and less output produced. Therefore the costs of production increase as firms are not making enough money to cover the extra costs.
How does marginal cost relate to the supply curve
when marginal cost increases, a firm will only produce more if the price of the good increases to cover the extra cost of each extra unit produced. Therefore the supply curve shows price-quantity combinations firms are willing to produce.
Why do firms produce less at a low price
firms will not supply a lot at a low price, as they won’t be able to cover the costs. They are only willing and able to supply a certain quantity as long as the price is enough to cover costs.
