8- Supply Flashcards
Supply definition
The quantity of a good or a service producers are willing and able to produce at a given price in a given time period.
Law of Supply
There is a direct relationship between price and quantity supplied. As price increases so does quantity demanded - assuming ceteris paribus.
What explains the law of supply?
- Profit Motive- there is a strong incentive to produce more when prices are higher as more profit can be made.
- Production and Costs- when output expands, a firm’s production costs tend to rise, therefore a higher price is needed to cover these extra costs of production. This may be due to the effects of diminishing returns as more factor inputs are added to production.
- New entrants to the market- higher prices may create an incentive for other businesses to enter a market leading to an increase in total supply.
Supply curve
It is almost always upwards sloping due to the direct relationship between price and quantity supplied.
Contraction of supply
A movement down the supply curve as price increases so does quantity supplied
Extension of Supply
A movement down the supply curve as prices decreases so do quantity supplied
Conditions of Supply
Non price factors that cause a change in supply:
- Productivity
- Indirect tax like VAT
- Number of firms/ new entrants into the market
- Technology
- Subsidy
- Weather
- Costs of production
What does a change in a condition of supply do to the supply curve?
If supply increases, the supply curve will shift to the right. And vice versa if supply decreases.
What is a Subsidy?
A financial grant by the government to increase supply.
Producer Surplus definition
The difference between the price consumers are willing and able to produce for compared to the price they actually receive.
Where is Producer Surplus found?
Below the price line but above the supply curve.
What is Diminishing Marginal Returns?
At a certain point, employing an additional factor of production causes a relatively smaller increase in output.
Diminishing returns occur in the short run when one factor is fixed (e.g. capital)
If the variable factor of production is increased (e.g. labour), there comes a point where it will become less productive and therefore there will eventually be a decreasing marginal and then average product.
This is because, if capital is fixed, extra workers will eventually get in each other’s way as they attempt to increase production. E.g. think about the effectiveness of extra workers in a small café. If more workers are employed, production could increase but more and more slowly.
This law only applies in the short run because, in the long run, all factors are variable.
Short Run Definition
Is the length of time where at least one factor of production is fixed.
Long Run Definition
Is the length of time over which all factors of production can be changed.
In the labour market, where is the supply for labour from?
Households
