Supply

Question 1

Name all the factors affecting market supply (x6)

Answer 1

• The price of the good or service itself
• The price of other goods or services
• The state of technology
• Changes in the cost of factors of production
• The quantity of the good available
• Climatic and seasonal influence

Question 2

How does the price of the good or service itself affect market supply (x2)?

Answer 2

• The market price of the good or service will influence the producer’s ability and willingness to supply it
• The expectations of suppliers about the future price of a good or service influences the level of supply e.g. if the supplier believes the price will rise in the future, supply of the good or service will increase

Question 3

How does the state of technology affect market supply?

Answer 3

Improvements in technology lower production costs and allow more firms to supply more goods at a given price

Question 4

Describe the law of supply

Answer 4

As the price of a certain product rises, the quantity supplied by producers will rise

Question 5

What is price elasticity of supply?

Answer 5

It measures the responsiveness of the quantity supplied of a product to changes in price

Question 6

Describe different types of price elasticity (x3)

Answer 6

• If the rise in quantity supplied is proportionally greater than the increase in price, then the supply is very responsive to a price change - thus is elastic
• A less than proportionate change in quantity supplied would indicate supply is relatively inelastic
• If quantity supplied rises by the same proportion as the price increase, supply is unit elastic

Question 7

Describe perfectly elastic supply

Answer 7

Where producers are willing to supply an infinite quantity or a good or service at one price but nothing at all at a price below this (highly unlikely)

Question 8

Describe perfectly inelastic supply

Answer 8

Where producers are willing to supply a given quantity of a good or service regardless of price (theoretical)

Question 9

Name the factors affecting elasticity of supply

Answer 9

• Time lags after a price change
• The ability to hold and store stock
• Excess capacity

Question 10

How do time lags after a price change affect supply?

Answer 10

• The greater amount of time that producers have to respond to a price change, the more elastic the supply is for the product in question
• In the time immediately after the price change, the supply of most products would be virtually perfectly inelastic because producers can increase any of the inputs

Question 11

How does the ability to hold stock affect elasticity of supply (x2)

Answer 11

• The ability to hold stock will affect the ease with which producers can respond to price changes
• The easier it is to hold stock, the more elastic the supply e.g. fruits and vegetables have relatively inelastic supply

Question 12

How does excess capacity affect elasticity of supply? (x2)

Answer 12

• Supply will be elastic when firms have excess capacity because they can responded quickly to any price increase by using their existing resources more intensively
• Supply will tend to be inelastic when resources are being used at full capacity

Question 13

What is market supply?

Answer 13

The supply of the entire industry at various prices