2.3 Supply

Question 1

Define ‘supply’

Answer 1

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

Question 2

What is the law of supply?

Answer 2

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

Question 3

Define ‘market supply’

Answer 3

the sum of all individual firms’ supplies for a good which is presented on a supply curve

Question 4

why can a supply curve be vertical

Answer 4

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

Question 5

what are non-price determinants of supply?

Answer 5

variables other than price that can influence supply

Question 6

what is a rightward shift called and what does it suggest?

Answer 6

indicates that more is supplied for the same given price = increase in supply

Question 7

what is a leftward shift called and what does it suggest?

Answer 7

indicates that less is supplied for the same given price = decrease in supply

Question 8

Describe ‘costs of factors of production’ as a determinant

Answer 8

if production costs increase
= decrease in supply (less profitable)

if production costs decrease
= increase in supply (more profitable)

Question 9

Describe ‘technology’ as a determinant

Answer 9

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)

Question 10

Describe ‘competitive supply’ as a determinant

Answer 10

• 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

Question 11

Describe ‘joint supply’ as a determinant

Answer 11

• two goods are derived from the same product

Increase in price of X, increase in supply X + Y

Question 12

Describe ‘future price expectations’ as a determinant

Answer 12

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)

Question 13

Describe ‘taxes’ as a determinant

Answer 13

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)

Question 14

Describe ‘subsidies’ as a determinant

Answer 14

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)

Question 15

Describe ‘number of firms’ as a determinant

Answer 15

increase in number of firms = increase in market supply
decrease in number of firms = decrease in market supply

Question 16

Describe ‘shocks’ as a determinant

Answer 16

when there is a shock (unpredictable event) e.g. natural disaster
= supply decreases

Question 17

What is a movement along the curve and when does it occur?

Answer 17

a change in price = change in (quantity) supplied which is shown as a movement on the supply curve

Question 18

what is the short run

Answer 18

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.

Question 19

What is a shift along the curve and when does it occur?

Answer 19

change in a non-price determinant = change in (supply) which is shown as a shift of the entire curve

Question 20

what is the long run

Answer 20

time period where all inputs can be changed and all inputs are variable.

Question 21

Define ‘total product’

Answer 21

total quantity of output produced by a firm

Question 22

Define ‘marginal product’

Answer 22

the extra output produced by one additional unit of a variable input (labour in short run)

Question 23

why does marginal product increase then decrease

Answer 23

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.

Question 24

What is the law of diminishing marginal returns

Answer 24

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

Question 25

Define ‘total cost’

Answer 25

all costs of production incurred by a firm

Question 26

Define ‘marginal cost’

Answer 26

the extra or additional cost of producing one more unit of output

Question 27

Why does marginal cost increase then decrease

Answer 27

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.

Question 28

why does marginal cost then start increasing

Answer 28

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.

Question 29

How does marginal cost relate to the supply curve

Answer 29

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.

Question 30

Why do firms produce less at a low price

Answer 30

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.