Micro- Economics (2.3)

Question 1

Supply

Answer 1

The quantity of a good or service that producers are willing and able to supply at a given price in a given time period. For most goods and services the quantity
demanded varies directly with price. This means that when the price of a commodity rises, the supply for it also increases. The higher the price for the good or service the more it will be supplied in the market. As a result, more suppliers will be interested in supplying those good or service whose prices are rising. Consequences they will gain a higher revenue and possibly profit.

Question 2

Individual Supply

Answer 2

The supply of goods and services by an individual
producer. This shows the amount they would be
prepared to sell at difference prices. It does not
tell us how many they will sell.

Question 3

Market Supply

Answer 3

The total supply of a good or service. It can be found

by adding the individual producers supply together.

Question 4

Movement up the curve

Answer 4

Both price and quantity supplied rise (an expansion of supply)

Question 5

Movement down the curve

Answer 5

Both price and quantity supplied fall (a contraction

of supply)

Question 6

Increase in supply due to a rightward shift of the supply curve

Answer 6

Price falls and the quantity supplied increases

Question 7

Decrease in supply due to a leftward shift of the supply curve

Answer 7

Price increases and quantity supplied decreases

Question 8

Factors affecting supply

Answer 8

1. Price of the goods and services: A rise in price will result in more of the commodity being supplied to the market and vice versa.
2. Prices of other commodities: For example if it is more profitable to produce LCD TVs then producers will produce more LCD TVs as compared to PLASMA TVs. Thus the supply curve for PLASMA TVs will shift inwards i.e. a fall in supply.
3. Change in cost of production: Increase in the cost of any factor of production may result in the decrease in supply as reduced profits might see producers less willing to produce that commodity.
4. Technological advancement: Improvement in technology results in lowering of cost of production and more profits for the producer and thus more supply of that commodity.
5. Climate: Climate and weather conditions affect the supply of commodities especially agricultural goods.

Question 9

Price Elasticity of Supply

Answer 9

Price elasticity of supply measures the responsiveness of quantity supplied to a change in price.

Question 10

Calculate PES

Answer 10

% change in Q.S / % change in price

Question 11

Inelastic Supply

Answer 11

A change in price causes a smaller proportional change in quantity supply. This means that an increase in price leads to a smaller % change in supply. Therefore PES <1

Question 12

Elastic Supply

Answer 12

A change in price causes a bigger proportional change in quantity supplied. This occurs when an increase in price leads to a bigger % increase in supply, therefore PES >1

Question 13

Effect of PES on consumers

Answer 13

• If PES is inelastic it may prove difficult for a consumer to get more of the same product without paying a much higher price. (e.g. seats in a stadium)
• if PES is elastic it is relatively easy for a consumer to obtain more of a product but it is less flexibility in negotiating the price the consumer wants.

Question 14

Effect of PES on producers

Answer 14

It is better for a firm to have PES elastic so that they can easily respond to changes in price. Producers can do this by:

• upgrading technology
• keeping large amounts of stock
• training employees to perform large numbers of jobs