4.1.2.3 The determinants of the supply of goods and services Flashcards
What is supply in economics?
Supply is the quantity of a good or service that producers are able and willing to sell at a given price during a specific period of time.
Why is the supply curve upward sloping?
The supply curve is upward sloping because:
- Higher prices increase profitability, encouraging firms to supply more.
- High prices attract new firms to enter the market, increasing supply.
- Larger outputs increase production costs, requiring higher prices to cover costs.
What causes movements along the supply curve?
Movements along the supply curve are caused by changes in the price of the good, leading to either an expansion (price rises, quantity supplied increases) or contraction (price falls, quantity supplied decreases) of supply.
What causes a shift in the supply curve?
A shift in the supply curve is caused by factors other than price, such as changes in productivity, technology, costs of production, or government policies (e.g., taxes, subsidies).
What is the mnemonic for factors that shift the supply curve?
The mnemonic is PINTSWC:
- Productivity
- Indirect taxes
- Number of firms
- Technology
- Subsidies
- Weather
- Costs of production
How does productivity affect supply?
Higher productivity reduces average costs, enabling firms to supply more at the same price, causing an outward shift in the supply curve.
How do indirect taxes affect supply?
Indirect taxes increase production costs, leading to an inward shift in the supply curve as firms supply less at the same price.
How does the number of firms affect supply?
An increase in the number of firms increases market supply, causing an outward shift in the supply curve.
How does technology affect supply?
Advances in technology reduce production costs and increase efficiency, leading to an outward shift in the supply curve.
How do subsidies affect supply?
Subsidies reduce production costs, encouraging firms to supply more, causing an outward shift in the supply curve.
How does weather affect supply?
Favourable weather conditions (e.g., for agricultural goods) increase supply, causing an outward shift in the supply curve.
How do costs of production affect supply?
If production costs rise (e.g., higher wages), supply decreases, causing an inward shift in the supply curve. If costs fall, supply increases, causing an outward shift.
How does a depreciation in the exchange rate affect supply?
A depreciation in the exchange rate increases the cost of imports, raising production costs and causing an inward shift in the supply curve.
What is the difference between an expansion and a contraction of supply?
Expansion of supply: Occurs when price rises, leading to an increase in quantity supplied.
Contraction of supply: Occurs when price falls, leading to a decrease in quantity supplied.
What is the difference between a movement along and a shift of the supply curve?
Movement along the curve: Caused by a change in the price of the good.
Shift of the curve: Caused by factors other than price (e.g., technology, taxes, subsidies).
Why do higher prices encourage firms to expand production?
Higher prices increase profitability, providing firms with the incentive to produce more and attract new firms to the market.
What is the profit motive in supply?
The profit motive drives firms to increase supply when prices rise, as higher prices lead to higher profits.
How do subsidies benefit producers and consumers?
Subsidies lower production costs, allowing producers to supply more. Consumers benefit from lower prices and increased availability of goods.
How do indirect taxes affect producers and consumers?
Indirect taxes increase production costs, reducing supply. Producers may pass some of the tax burden to consumers through higher prices.
What is the relationship between supply and production costs?
Lower production costs increase supply, while higher production costs decrease supply, as firms adjust output to maintain profitability.
