Law of supply (ch7) and workbook qs

Question 1

intersection of demand curve and supply curve

Answer 1

equilibrium price

Question 2

Individual supply is

Answer 2

the various quantities of good or a service that sellers will place on the market per unit of time

Question 3

Market supply

Answer 3

total of supply of all the individual firms (total production of the society)- resources, labour depended

Question 4

State the law of supply and explain it.

Answer 4

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

Question 5

Factors affecting supply/ determinants of supply

Answer 5

1. 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.
2. 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
3. state of technology
   - improvements in technology lower production costs, less lead time and new products, which enable producers to increase supply
4. 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
5. The quantity of the good available
   - e.g. limited number of electric cars supplied, but when more suppliers enter the market, supply increase
6. 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

Question 6

price ceiling

Answer 6

A type of price control where the law mandates the highest point where a good/ service can be sold

Question 7

Elasticity of supply

Answer 7

How responsive the quantity supplied is to a change in price

Question 8

Said to be elastic when

Answer 8

An increase in price increases the quantity supplied a lot (or decrease)
- less steep

Question 9

Said to be inelastic when

Answer 9

The same increase in price increases quantity supplied just a little.
- steeper

Question 10

determinant of the elasticity of supply

Answer 10

-
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

2. ## the time horizon

Question 11

Pe

Answer 11

Equilibrium price

Question 12

Qd

Answer 12

Quantity demanded

Question 13

Qs

Answer 13

Quantity supplied

Question 14

What happens at the Pe?

Answer 14

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

Question 15

What happens when the market price is above the equilibrium price?

Answer 15

A surplus occurs.

Question 16

MP

Answer 16

Market price

Question 17

What happens when the market price is below the equilibrium price?

Answer 17

A shortage occurs.

Question 18

Qe
What happens there?

Answer 18

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

Question 19

How to find surplus and shortage on a graph?

Answer 19

At the price below/ above the Pe, the gap between the two points on the two curves is the surplus/ shortage.

Question 20

Under what assumption is the supply schedule constructed? What does the supply schedule show us?

Answer 20

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

Question 21

How is the market supply schedule formed?

Answer 21

Derived from the summation of all the supply schedules of the individual firms that operate in the industry.

Question 22

Why does the law of supply occur?

Answer 22

• 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.

Question 23

Describe the supply curve.

Answer 23

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

Question 24

Contractions of supply

Answer 24

When a decrease in the price of a good or service causes the quantity of goods and services supplied.
- downward movement along curve

Question 25

Expansions of supply

Answer 25

When an increase in the price of a good or service causes the quantity of goods and services supplied. - upward movement along curve

Question 26

Describe what it means when there is an increase in supply.

Answer 26

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.

Question 27

Describe what it means when there is a decrease in supply.

Answer 27

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.

Question 28

What factors can potentially cause an increase or decrease in supply?

Answer 28

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

Question 29

Outline the difference between an increase and an expansion in supply. (2 marks)

Answer 29

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.

Question 30

Explain how an increase in the cost of factors of production would affect market supply. (2 marks)

Answer 30

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.

Question 31

Explain two possible factors causing an increase in supply curve. (4 marks)

Answer 31

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.

Question 32

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)

Answer 32

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.

Question 33

Describe the likely effect of increased supply of wireless chargers on the supply of wired chargers. (1 mark)

Answer 33

The supply of wired chargers would decrease because wireless chargers are a substitute good.

Question 34

Define the law of supply. (1 mark)

Answer 34

(e) As the price of a certain product rises, the quantity supplied by producers will also rise.

Question 35

Explain why there is a direct relationship between price and quantity supplied. (3 marks)

Answer 35

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.