microeconomics 1.2.4 onwards

Question 1

Definition of supply

Answer 1

Supply is the quantity of a good or service that a producer is willing and able to supply onto the market at a given price in a given time

Question 2

Basic law of supply

Answer 2

The basic law of supply is that as the price of a product rises business expand supply to the market

Question 3

What does the supply curve show

Answer 3

Shows a relationship between market price and how much a firm is willing and able to sell.

Question 4

When does a supply curve experience expansion and contraction

Answer 4

A rise in the market price brings about an expansion of supply - produces the responding to the profit motive
If market prices fall we expect to see a contraction of supply and producers have less incentive to produce at lower prices

Question 5

What causes a movement along the supply curve

Answer 5

A movement along the supply curve is caused solely by a change in price, all factors remaining constant

Question 6

3 reasons why supply curves are drawn as sloping upwards from left to right

Answer 6

• The profit motive - If the market price rises following an increase in demand, it becomes more profitable for businesses to increase output
• Production and costs - when output expands a firm’s production costs tend to rise therefore a higher price is needed to cover these extra returns as more factor inputs are added to production
• New entrants coming into the market - Higher prices may create an incentive for other businesses to enter a market leading to an increase in total supply

Question 7

What is market supply

Answer 7

Market supply is the total supply brought to the market by producers at each price. To calculate, sum the individual supply schedules

Question 8

What causes a shift of the market supply

Answer 8

An outward shift of the market supply will take place if there is a change in a non-price factor, which affects producers
An inward shift of the market supply curve means that producers cannot supply as much at each price level

Question 9

Causes of shifts in the market supply curve

Answer 9

• Changes in the unit costs of production
• A fall in the exchange rates causes an increase in prices of imported components and raw materials
• Advances in production technology causes outward shift
• Favourable weather conditions
• Favourable weather
• Taxes, subsidies and government regulations - indirect taxes causes an inward shift of supply, subsidies cause an outward shift of supply and regulation increase costs - causing an inward of supply

Question 10

Relationship between cost and supply

Answer 10

An increase in costs leads to a decrease in supply
A decrease in costs leads to an increase in supply