Chapter 7: Supply Flashcards
What are the factors affecting market supply 6
the price of the good and service itself - the price of the G&S will influence the producer’s ability and willingness to supply it eg expect price rise ->increase in demand -> supply increase
the state of technology - lower production costs allow firms to supply more goods and adjust quickly to accommodate changing demand patterns
changes in the cost of factors of production - fall in cost of production allow firms to supply more
the quantity of the good available - as more suppliers enter the industry, supply increases and vice
climatic and seasonal influence - agricultural products
movements along the supply curve: what is the law of supply
as the price of a certain product increases, the quantity supplied by producers will rise
occurs for 2 reasons:
producing the good becomes more profitable
attract new firms to the industry
the supply curve features and shifting along supply curve
sloping upward from left to right
more is supplied at a higher price and less at a lower price
contraction is going up the supply curve whereas expansion is down
a contraction in supply occurs when a decrease in price causes the quantity supplied to fall
a expansion in supply occurs when an increase in price causes the quantity supplied to rise
shifting the supply curve which way is increase and which way is decrease
happens when there is a change is any of the factors other than price
increases in supply shift to the right (due to lower resource costs, higher productivity, positive eco outlook, etc)
decreases in supply shift to the left (due to higher production costs, development of alternative products, seasonal influences, etc)
what causes an increase in supply
fall in price of other goods (production of other goods less profitable)
improvement in tech in production process ie less ppl are gonna produce other goods
fall in cost of factors of production
increase in quantity of resources
climatic conditions change to be more favourable
what causes a decrease in supply
a rise in the price of other goods ie everyone would be supplying other goods
certain tech no longer available
rise in cost of factors of production
decrease in the quantity of resources available
regulations due to health concerns eg fireworks
climatic conditions unfavourable
define price elasticity of supply and elastic inelastic and unit elastic
measures the sensitivity of the quant supplied of a product to changes in its price
eg if the rise in quantity supplied is proportionately greater than the increase in price, then its very responsive thus relatively elastic
if the rise in quant supplied is less than proportionate to increase in price it is relatively inelastic
If quant supplied rises by the same proportion as the price increases, supply is unit elastic
How to measure price elasticity?
Elasticity can be measured by the % change in quant supplied divided by the % change in price For example, if the price of chicken rose by 10% and the quantity supplied rose by 15%, E=1.5
Supply is said to be price elastic if the change in quant supplied is proportionately greater than the change in price ie E>1
Supply is price inelastic id the change in quant supplied is prop less than change in price ie E<1
Supply unit elastic when E=1
what are the extreme cases
Perfectly inelastic supply - quant supplied does not vary at all with price - eg scarce land resources, antiques/discontinued items - vertical curve
Perfectly elastic supply - quant supplied is infinite at a one price, but drops to 0 with any decrease in price - horizontal curve
Unit elasticity of supply - quant supplied responds proportionately to price, passes through origin eg petrol
Identify the Factors affecting the elasticity of supply
time lags after a price change
the ability to hold and store stock
excess capacity
outline how time lags after a price change affect the elasticity of supply
What is market period, long term and short term
The greater the amount of time a firm has to react after a price change, the more elastic the supply as they can change the input of resources and amt of productivity eg employ more workers or increase production plant size
Immediately after a price change, the supply of most products would be perfectly inelastic bcos producers can increase the inputs eg a pie shop bakes 20 pies to sell throughout the day, they cant make any more as they have run out of resources. This is in the market period.
In the short run, producers have both fixed and variable factors of production to adjust supply thus price elasticity increases due to their preexisting resources
In the long run, producers able to increase any of the inputs and their production plant size and thus facilitate a greater increase in production making supply relatively price elastic
outline how the ability to hold and store stock affect the elasticity of supply
In short, the easier it is to hold stock, the more elastic the supply
