Law of supply (ch7) and workbook qs Flashcards
intersection of demand curve and supply curve
equilibrium price
Individual supply is
the various quantities of good or a service that sellers will place on the market per unit of time
Market supply
total of supply of all the individual firms (total production of the society)- resources, labour depended
State the law of supply and explain it.
the higher the price, the larger the quantity produced
- because more profit can be made by suppliers
- profit= motivation of suppliers to produce more products
- stimulates mores suppliers to produce this product
- encouraging new firms to join this industry
Factors affecting supply/ determinants of supply
- price of the good or service itself
- influence the producer’s ability and willingness to supply it - - (expectation of suppliers about the future price of a good or service also influences the supply- due to the possibility of increased profit arising from the supply of the good. - price of other goods or services
- if prices of alternative goods and services are higher than others, producers may want to supply the alternative g&s if prices and profits are potentially higher in the market - state of technology
- improvements in technology lower production costs, less lead time and new products, which enable producers to increase supply - Changes in the cost of factors in production
- lower production costs will enable producers to increase supply over a range of prices
- higher production costs force producers to reduce supply
- quantity and quality of resources also impact on supply and overall production costs - The quantity of the good available
- e.g. limited number of electric cars supplied, but when more suppliers enter the market, supply increase - Climatic and seasonal influences
- changes in climatic conditions and sessions affect the agricultural production
- e.g. drought causes supply issues in agricultural products such as rice, wheat
price ceiling
A type of price control where the law mandates the highest point where a good/ service can be sold
Elasticity of supply
How responsive the quantity supplied is to a change in price
Said to be elastic when
An increase in price increases the quantity supplied a lot (or decrease)
- less steep
Said to be inelastic when
The same increase in price increases quantity supplied just a little.
- steeper
determinant of the elasticity of supply
-
1. how quickly per-unit costs increase with an increase in production
- if increased production requires much higher costs, the supply curve will be inelastic
- if production can increase with constant costs, the supply curve will be elastic
~ how cost efficient= how elastic
- ## the time horizon
Pe
Equilibrium price
Qd
Quantity demanded
Qs
Quantity supplied
What happens at the Pe?
At the equilibrium price, consumers want a certain number of an item while all the producers are willing to supply at that number.
- No producer or consumer willing to deal at that market price goes home unhappy
What happens when the market price is above the equilibrium price?
A surplus occurs.
MP
Market price
What happens when the market price is below the equilibrium price?
A shortage occurs.
Qe
What happens there?
Equilibrium quantity
Qs=Qd
- market is cleared
- no consumers ready to buy the product at the Pe goes home empty-handed and no producers willing to sell their product at the Pe don’t sell their entire stock
How to find surplus and shortage on a graph?
At the price below/ above the Pe, the gap between the two points on the two curves is the surplus/ shortage.
Under what assumption is the supply schedule constructed? What does the supply schedule show us?
assuming all other factors that could influence supply apart from price remain constant- ceteris paribus
- shows the quantity of a good that will be supplied over a range of prices at a given point in time
How is the market supply schedule formed?
Derived from the summation of all the supply schedules of the individual firms that operate in the industry.
Why does the law of supply occur?
- For firms already in the industry, producing the good becomes more profitable, so they increase their production of good
- The higher price also makes producing this good more profitable for other businesses, which will attract new firms into the industry. This will also cause an increase in the quantity supplied.
Describe the supply curve.
Price in y axis, quantity in x axis.
- typically a growing curve
- more is supplied at a higher price, less is supplied at a lower price
Contractions of supply
When a decrease in the price of a good or service causes the quantity of goods and services supplied.
- downward movement along curve
Expansions of supply
When an increase in the price of a good or service causes the quantity of goods and services supplied.
- upward movement along curve
Describe what it means when there is an increase in supply.
Firms are now able and willing to produce a greater Qs than before at the same price.
Where they are also willing to supply a given quantity at a lower price than before.
Describe what it means when there is a decrease in supply.
Firms are now able and willing to produce a less of Qs than before at the same price.
Where they are also willing to supply a given quantity at a higher price than before.
What factors can potentially cause an increase or decrease in supply?
Increase
* A fall in the price of other goods, which makes production of other goods less profitable
* An improvement in the technology used in the production process
* A fall in the cost of factors of production, such as labour or capital
* An increase in the quantity of resources available to be used in production
* Climatic conditions or seasonal changes that are more favourable to the production process.
Decrease
* A rise in the price of other goods
* A certain technology no longer being available (which is highly unlikely)
* A rise in the cost of factors of production
* A decrease in the quantity of resources available
* Regulations relating to health and safety (for example COVID-19 social distancing rules restricting the number of people allowed inside premises such as a cinema
or restaurant at any one time)
* Climatic conditions or seasonal changes that are less favourable to the production of a particular good
Outline the difference between an increase and an expansion in supply. (2 marks)
An increase in supply involves a shift of the supply curve to the right. That is, at every price
level, a higher quantity will be supplied. An increase in supply is caused by factors other than
price changes in the good or service itself. In contrast, an expansion in supply involves an
upward movement along the existing supply curve, which occurs because of an increase in
the price of the good or service.
Explain how an increase in the cost of factors of production would affect market supply. (2 marks)
An increase in the cost of factors of production, such as an increase in the cost of technology
or labour, will make it less profitable for a firm to supply a good or service. This is likely to lead
to a reduction in supply, reflected in a shift in the supply curve to the left.
Explain two possible factors causing an increase in supply curve. (4 marks)
A correct answer may include any two of the following:
* A fall in the price of other goods would make other industries less profitable, leading to
firms entering the market, increasing supply.
* A decline in the cost of the factors of production (such as lower wages) will mean that at
a particular price, a firm will be able to supply a greater quantity of products, increasing
supply.
* An increase in the quantity of resources available will lift the maximum possible quantity
of production and lowers input costs, increasing supply.
* More favourable market conditions, such as a reduction in taxes on the production or
sale of a good or service, will increase supply.
An improvement in the production process enables wireless chargers to be produced three times faster than before. Describe the likely effect of this on the supply of wireless chargers. (1 mark)
The improvement in production technology lowers the cost of making wireless chargers and
therefore allows firms to supply more goods at each given price. This would be represented
by a shift in the supply curve to the right.
Describe the likely effect of increased supply of wireless chargers on the supply of wired chargers. (1 mark)
The supply of wired chargers would decrease because wireless chargers are a substitute
good.
Define the law of supply. (1 mark)
(e) As the price of a certain product rises, the quantity supplied by producers will also rise.
Explain why there is a direct relationship between price and quantity supplied. (3 marks)
In line with the law of supply, firms under normal conditions will be willing to produce greater
quantities at higher prices as they will earn higher revenues. Also, as a firm increases its output
levels, it may start to experience internal diseconomies of scale, leading to increased costs of
production. This means that a firm’s higher costs per unit will be reflected through higher
prices per unit as its supply increases.
