CH11 Supply

Question 1

What is supply?

Answer 1

the quantity of goods that suppliers are willing to sell at any given price over a period of time

Question 2

What happens to supply if prices rise?

Answer 2

if prices rise (all other things being equal), supply rises

Question 3

what will a fall in price lead to in terms of supply?

Answer 3

a fall in price will lead to a fall in quantity supplied, or a contraction of supply

Question 4

what does an upwards sloping curve assume?

Answer 4

an upwards sloping curve assumes that:
-firms are motivated to produce by profit (so this model does not apply, for instance, to much to what is produced by government.
-the cost of producing a unit increases as output increases (a situation known as rising marginal cost). This is not always true but it is likely that the prices of factors of production to the firm will increase as firms bid for more land, labour and capital to increase their output, thus pushing costs up

Question 5

how are the effects of changes in price shown on a supply curve?

Answer 5

by a movement along the supply curve

Question 6

what are the other factors apart from price which can affect supply called?

Answer 6

conditions of supply

Question 7

what do changes in the conditions of supply cause?

Answer 7

they cause the supply curve to shift either to the left or to the right

Question 8

what do the conditions of supply include?

Answer 8

they include the costs of production, technology and the prices of other goods

Question 9

what happens if the costs of production increase at any given level of output?

Answer 9

-if the costs of production increase at any given level of output, firms will attempt to pass on these increases in the form of higher prices.
-if they cannot charge higher prices then profits will fall and firms will produce less of the good or might even stop producing it altogether.
-a rise in the costs of production will therefore lead to a decrease in supply

Question 10

what happens to supply if there is new technology?

Answer 10

-if new tech is introduced to the production process it should lead to a fall in the costs of production.
-this greater productive efficiency will encourage firms to produce more at the same price or produce the same amount at a lower price or some combination of the two.
-the supply curve will shift downwards (right).

Question 11

what are the other 5 factors that affect supply?

Answer 11

-the goals of the sellers
-government legislation
-expectations of future events
-the weather
-producer cartels

Question 12

what is meant by the producer surplus?

Answer 12

-it is the difference between the market price which firms receive and the price at which they are prepared to supply

Question 13

what is meant by price elasticity of supply?

Answer 13

it is a measure of the responsiveness of quantity supplied to a change in price

Question 14

what is the formula for measuring price elasticity of supply?

Answer 14

% change in quantity supplied / % change in price

Question 15

when is price elasticity of supply perfectly inelastic?

Answer 15

when the value is 0, so there is no response in quantity supplied to a change in price

Question 16

when is price elasticity of supply inelastic?

Answer 16

when the value is between 0 and 1,

Question 17

when is price elasticity of supply unitary?

Answer 17

when the value is 1, so the percentage change in quantity supplied equals the percentage change in price

Question 18

when is price elasticity of supply elastic?

Answer 18

when the value is more than 1 (between 1 and infinity)

Question 19

when is price elasticity of supply perfectly elastic?

Answer 19

when the value is infinity, so producers are prepared to supply any amount at a given price

Question 20

what are the 2 factors which determine supply elasticity across a wide range of products?

Answer 20

-availability of substitutes. Substitutes here are not consumer substitutes but producer substitutes. These are goods which producers can easily produce as alternatives
-time. The shorter the time period the more difficult producers find it to switch from making one product to another. So in the short term, supply is likely to be more price inelastic than in the long term.

Question 21

what are the 4 reasons why in the short term, supply is likely to be more price inelastic than in the long term?

Answer 21

-some items take a long time to make. E.g if there is a crop failure of a product like hazelnut, it will take until the next growing season to increase supply again whatever price the market sets for hazelnuts in the short term.
-if there is not spare capacity to make more of a product, it will be difficult to increase supply very much even if prices rise sharply. The more spare capacity, the less constraints this places on increasing supply in response to price rises.
-with some products, it is easy and relatively cheap to hold stocks to supply the market when they are demanded. With others it is impossible to hold stocks.
-price elasticity of supply will be higher the easier it is for a firm to switch production from one product to another or for firms to enter the market to make the product.

Question 22

what is the precise meaning of ‘long run’ in micro economics?

Answer 22

it is the period of time when all factor inputs can be varied but the state of technology remains constant.

Question 22

what is the precise meaning of ‘long run’ in micro economics?

Answer 22

it is the period of time when all factor inputs can be varied but the state of technology remains constant.

Question 23

what is the precise meaning of ‘short run’ in micro economics?

Answer 23

the short run is defined as being the period of time when at least one factor of production is fixed. This means it cannot be changes