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

Question 11

What is joint supply

Answer 11

Where an increase or decrease in supply of one good leads to an increase or decrease in supply of another by-product

Question 12

What is price elasticity of supply

Answer 12

Measures how supply responds to a change in price. If supply is elastic producers can increase their output without a rise in costs or a time delay. If supply is inelastic firms find it hard to change their production in a given time time period

Question 13

Formula for price elasticity of supply

Answer 13

%change in quantity supplied
%change in price

Question 14

How do we use the pes value to predict the elasticity of supply

Answer 14

when pes>1, then price is elastic
when pes<then supply is price elastic
when pes=0 then supply is perfectly inelastic
when pes=infinity then supply is perfectly elastic following a change in price

Question 15

Factors affecting price elasticity of supply

Answer 15

Spare production capacity: If there is plenty of spare capacity then a business can increase output without a rise in costs so supply will be more elastic
Stocks of finished products and components: If stocks of raw materials are finished products are at high levels then a firm is able to respond to a change in demand more quickly
Ease and cost of factor substitution/ factor mobility: if capital and labour are occupationally mobile then the elasticity of a product is likely to be higher as resources can be mobilised to supply the extra output
Time period and production speed: supply is more price elastic the longer time that a firm is allowed to adjust to production levels

Question 16

Difference between the short run and long run

Answer 16

In the short run, at least one factor of production is fixed and cannot be varied whereas in the long run no factors of productions are fixed and they can all be varied

Question 17

How does the shirt run affect price elasticity of supply

Answer 17

Supply cannot respond to the increase in demand because all the factors cannot be changed

Question 18

What is market equilibrium

Answer 18

Market equilibrium is that point at which demand is equal to supply. This is known as the market cleaning price as all products will be sold at this price because all buyers can get the exact amount they want to buy at this price and all sellers provide exactly the amount that they want to sell at this price

Question 19

What is excess supply

Answer 19

An equilibrium is a state of balance between market demand and supply so there is not excess demand or supply. If the current market price shifts there would be an excess supply which would put downward pressure on price

Question 20

How do we get back to equilibrium from excess demand or supply

Answer 20

Market forces are always pushing prices towards market equilibrium. Too much supply leads to lower prices and too much demand leads to higher prices

Question 21

What does an outward shift of market demand lead to

Answer 21

Leads to a rise in equilibrium price and an expansion of market supply

Question 22

What does an inward supply of market demand lead to

Answer 22

Leads to a fall in equilibrium market price and a contraction of market supply

Question 23

What does an inward shift in market supply cause

Answer 23

An inward shift in market supply leads to a rise in equilibrium price and a contraction in market demand

Question 24

What happens immediately after demand increases

Answer 24

An increase in demand in the immediate period leads to the price increasing at a high price before an expansion of supply takes effect due to the profit motive

Question 25

What happens if the size of the outward shift of market supply exceeds the increase in market demand

Answer 25

Both quantity bought and sold increases but the market price falls

Question 26

Reasons for change in supply of beef

Answer 26

Increase in costs of animal food stuff
Higher rents paid by beef farmers
Rise in wages of farm labourers

Question 27

Reasons for change in demand of beef

Answer 27

Rise in price of beef substitutes
Rise in real incomes if YED>0
Change in taste and preferences

Question 28

An increase and decrease in demand causes what effect on equilibrium price and quantity

Answer 28

When demand increases both equilibrium price and quantity increases
When demand decreases equilibrium price decreases and quantity decreases

Question 29

An increase and decrease in supply causes what effect on equilibrium price and quantity

Answer 29

When supply increases quantity increases and price decreases
When supply decreases quantity decreases and price increases

Question 30

Three elements of the price mechanism

Answer 30

Rationing
Signalling
Incentive

Question 31

What is the rationing function

Answer 31

When there is a shortage of a product, price will rise and deter some consumers from buying the product. Higher prices ration the scarce resources to those who can afford to pay

Question 32

How does the rationing function effect demand and supply

Answer 32

Excess demand for a good or service will lead to a rise in the price of a good or service due to it’s scarcity. Price rise leads to a reduction in demand

Question 33

What is the signalling function

Answer 33

Changes in price provides information to both consumers and producers about the changes in market conditions

Question 34

What signal does an increase in price give

Answer 34

Gives an indication to producers that they should increase supply due to the profit motive and will give an indication to consumers that they should reduce demand

Question 35

What signal does an decrease in price give

Answer 35

Indicates to producers that they should decrease supply and gives an indication to consumers that they should increase demand

Question 36

What is the incentive function

Answer 36

Higher prices provide an incentive tio existing producers to supply more because they provide the possibility of more revenue and increased profits

Question 37

Price mechanism in a local market

Answer 37

The price mechanism functions normally

Question 38

Price mechanism in a national market

Answer 38

The price mechanism will still work the same but on this scale the implications of it can be much greater and efficient outcomes are harder to achieve eg. will be limited on the housing market

Question 39

Price mechanism in an international market

Answer 39

The price mechanism will still play the same role but the scale of the goods and services means it is influenced by all the countries which can limit the mechanisms working in the UK

Question 40

What is consumer surplus

Answer 40

Consumer surplus is the difference between the total amount that consumers are willing and able to pay for a good and service and the amount they pay

Question 41

How is consumer surplus indicated

Answer 41

By the area under the demand curve and above
the market price

Question 42

How does higher supply costs effect consumer surplus

Answer 42

Higher supply costs leads to a rise in market price and therefore a decrease in consumer surplus

Question 43

How does an increase in market demand effect consumer surplus

Answer 43

An increase in market demand causes consumer surplus to increase

Question 44

Relationship between consumer surplus and pirce elasticity of demand

Answer 44

When demand is inelastic there is a greater consumer surplus because there are some buyers willing to pay a very high price to continue consuming the product

Question 45

What is producer surplus

Answer 45

Producer surplus is the difference between the price producers are willing and able to supply a good or service for and the price they actually receive

Question 46

How is producer surplus indicated on a graph

Answer 46

Shown by the area above the supply curve and below the current market price

Question 47

How do higher prices affect producer surplus

Answer 47

Higher prices provides an incentive to supply more due to the profit motive and therefore the producer surplus

Question 48

How do lower supply cost affect producer surplus

Answer 48

Lower supply costs causes the market price to fall and the equilibrium quantity to rise, producer surplus to increase

Question 49

How does an increase in demand affect producer surplus

Answer 49

An increase in demand means a higher equilibrium price and quantity leading to a rise in producer surplus