Chapter 4 - Supply Flashcards
What is a competitive market?
A market in which individual firms cannot influence the price of a good or service they are selling, because of competition from other firms.
What are the factors that influence supply?
- Production costs
- Technology of production
- Taxes and Subsidies
- The price of related goods
- Expected prices
- The number of firms in the market
What would happen to supply if production costs increase?
Firms are expected to supply less output at any given price. There is a decrease in supply and the supply curve shifts to the left.
How does technology of production affect supply?
If a new technology of production is introduced, which means that firms can produce more cost effectively, so there is an increase in supply shifting the supply curve to the right. For example, firms may take advantage of a new type of machinery that uses inputs more efficiently.
How does taxes and subsidies affect supply?
From the firm’s perspective, taxes is an increase in the costs of production. This means that firms will (ceteris paribus) be prepared to supply less output at any given market price. Again, the supply curve
shifts to the left.
If the government pays firms a subsidy to produce a particular good, this will reduce their costs, and induce them to supply more output at any given price. The supply curve will then shift to the right
What is competitive supply?
A situation in which firms can use its factors of production to produce alternative products
What is joint supply?
Where a firm produces more than one product together
(e.g. a sheep farmer can produce both wool and meat from the sheep)
How does price of related goods affect supply?
For example, suppose that a farmer who is currently producing potatoes discovers
that organic carrots are more profitable because prices have increased. The farmer may decide to switch production from potatoes to organic carrots.
A firm may face a situation in which there are alternative uses to which its factors of production may be put: in other words, it may be able to choose between producing a range of different products: a situation of
competitive supply. A rise in the price of a good raises its profitability, and therefore may encourage a firm to switch production from other goods. This may happen even if there are high switching costs, provided
the increase in price is sufficiently large.
In other circumstances, a firm may produce a range of goods jointly. Perhaps one good is a by-product of the production process of another. For example, a sheep farmer can produce both wool and meat from the sheep. An increase in the price of one of the goods may mean that the firm will produce more of both goods. This is called joint supply.
How does expected prices affect supply?
Because production takes time, firms often take decisions about how much to supply on the basis of expected future prices. Indeed, if their product is one that can be stored, there may be times when a firm will
decide to allow stocks of a product to build up in anticipation of a higher price in the future, perhaps by holding back some of its production from current sales. In some economic activities, expectations about future prices are crucial in taking supply decisions because of the length of time
needed in order to increase output. For example, a building firm may see that house prices are increasing in a certain area, but cannot supply new houses immediately because they take time to build.
How does the number of firms in the market affect supply?
As the market supply curve is the sum of the supply curves of individual firms,
if more firms join the market, the market supply curve will shift right. Similarly, if
some firms go out of business, the market supply curve will shift to the left.
What causes changes in the supply curve?
If there is a change in market price, this induces a movement along the supply curve (extension or contraction)
A change in any other influences on supply will induce a shift of the whole supply curve
What is producer surplus?
The difference between the price received by firms for a good or service and the price at which they would have been prepared to supply that good or service.
How does the shape of the supply curve affect producer surplus?
The shape of the supply curve shows the extent to which firms are able to expand quantity supplied in response to a price increase - and the shape of the curve also determines how much additional surplus
can be made.
If firms cannot readily expand supply (i.e. if the supply curve is relatively steep), the increase in quantity supplied will be smaller and the additional producer surplus will be lower.
