Chapter 5- Supply Flashcards
Subsidy
A grant given to producers, usually to encourage production of certain goods.
Supply
The amount of a product that suppliers make available to the market at any given time in a given time period.
The higher the price of a particular good or service, the more that will be offered to the market.
Supply curve
A line drawn on a graph that shows how much of a good, sellers are willing to supply at different prices.
The supply curve slopes from left to right because at higher prices a greater quantity will be supplied to the market and at lower prices less will be supplied
Factors leading to change in supply: (Internal shocks)
- Changes in the costs of production
- Availability of resources
- Introduction of new technology
- Indirect taxes
- Government subsidies
Changes in the costs of production (internal shock)
If production costs rise, sellers are likely to reduce supply, because their profits will be reduced.
A rise in costs will cause the supply curve to shift to the left. If costs fall, supply will increase because production becomes more profitable. As a result the supply curve will shift to the right.
Availability of resources (internal shock)
If there is a shortage of the factors of production such as land, labour etc., it will make it difficult for producers to supply to the market.
In the UK in 2013, it was widely supported that there were labour shortages – there were around 40 areas of skills shortages particularly in the teaching sector were around 20,000 further teachers were needed in the UK.
Indirect taxes (internal shock)
These are taxes imposed by the government on spending e.g. VAT and excise duties on petrol or tobacco.
If indirect taxes are increased then supply is likely to decrease due to the firm having higher costs, and the supply curve will shift to the left.
If indirect taxes are reduced, the supply curve will shift to the right, because costs will be lower and firms will be encouraged to spend more in the market.
If indirect tax is imposed and demand is relatively inelastic, the consumer will bear greater burden of tax.
Government subsidies (internal shock)
Subsidies are given to firms often to encourage them to produce a particular product. If the government grants a subsidy on a good the effect is to increase its supply.
This is because subsidies help to reduce production costs = supply curve will shift to the right.
For example, in 2014 the UK government announced that it would give £300 million subsidies to the renewable energy industries to encourage further development
Factors leading to change in supply: (external shocks)
- World events
- Weather
- Government
- Price of related goods-
World events (external shocks)
e.g. conflict such as in the middle east where supplies of oil are threatened and the price rises as much of global supply comes from this region.
Or global financial crisis in 2008, resulted in the ‘credit crunch’ = firms were unable to borrow money.
Weather (external shocks)
Supply of agricultural products dependant on the weather. Good growing conditions = high crop yields and increased supply. Bad weather such as droughts, can reduce crop yields severely and cause shortages.
As well as bad weather, such as snow storms, disrupting the supply in the short term, by hampering distribution of goods due to closed roads, railway lines and airports.
In 2014 there were bumper crops of wheat in Europe and the Black Sea region due to favourable growing conditions. The increase in the global supply of wheat helped to reduce prices
Government (external shocks)
gov economic policies can have an impact on supply. E.g. if the bank of England increased interest rates (in order to meet gov inflation target), this could increase business costs for firms with debt- borrowing to invest might also be discouraged.
Gov legislation could also mean that supply changes occur, e.g. if gov passes a law to make a particular market more competitive, then supply in that market is likely to increase as new entrants join the market.
Price of related goods
Supply can be affected by price changes of related goods. e.g. if farmer of potatoes sees price of carrots and parsnips increase then next season they may produce more carrots and potatoes due to possibly of gaining higher profits however then supply of potatoes may decrease.
