Supply Flashcards
Supply curve
-Supply is the quantity of a good or service that a producer is able and willing to supply at a given price during a given period of time.
-Supply curves are upwards sloping because:
-If price increases, it is more profitable for firms to supply the good, so supply increases.
-High prices encourage new firms to enter the market, because it seems profitable, so supply increases.
-With larger outputs, firms costs increase, so they need to charge a higher price to cover the costs.
Movements along the supply curve
-At price P1, a quantity of Q1 is supplied. At the lower price of P2, Q2 is supplied. This is a contraction of supply. If price increases from P2 to P1, QS increases from Q2 to Q1. This is an expansion of supply. Only changes in price will cause these movements along the supply curve. This is based on the theory of the profit motive. Firms are driven by the desire to make large profits.
Shifting the supply curve
-Price changes don’t shift the supply curve. A shift from S1 to S2 is an outward shift in supply, so a larger quantity of goods is supplied at the market price of P1. A shift from S3 to S1 is an inward shift in supply. More goods are supplied at the market price of P1.
The factors that shift the supply curve can be remembered using the mnemonic PINTSWC
P-Productivity. Higher productivity causes an outward shift in supply, because average costs for the firm fall.
I-Indirect taxes. Inward shift in supply
N-number of firms-The more firms there are, the larger the supply.
T-technology- More advanced technology causes an outward shift in supply.
S-subsidies-subsidies cause an outward shift in supply.
W-weather-this is particularly for agricultural produce. Favourable conditions will increase supply.
C-Costs of production-if costs of production fall, the firm can afford to supply more. If costs rise, such as with higher wages, there will be an inward shift in supply.
-Also a depreciation of the exchange rate will increase the cost of imports, which will cause an inward shift in supply. A depreciation in the pound against the US dollar causes a reduction in the purchasing power of the pound when buying goods in dollars.
Types of supply
Joint supply-This is when increasing the supply of one good causes an increase or decrease in the supply of another good. For example, producing more lamb will increase the supply of wool.
Competitive supply- production of one good prevents the supply of another eg if farmers kill cows they can no longer produce milk.
Price elasticity of supply
-The price elasticity of supply is the responsiveness of a change in supply to a change in price. The formula is
PES= percentage change in quantity supplied/ percentage change in price
Elastic and inelastic supply
-If supply is elastic, firms can increase supply quickly at little cost. The numerical value for PES is >1
-If supply is inelastic, an increase in supply will be expensive for firms and take a long time. PES is <1.
-A perfectly inelastic supply has PES=0. Supply is fixed, so if there is a change in demand, it can’t easily be met.
-Supply is perfectly elastic when PES=infinity. Any quantity demanded can be met without changing price.
Factors influencing PES
1)Time scale-In the short run, supply is more price inelastic, because producers cannot quickly increase supply. In the long run, supply becomes more price elastic. The short run is the period of time in which at least one factor of production is fixed. The long run is the period of time in which all factors of production are variable.
2)Spare capacity-If the firm is operating at full capacity, there is no space left to increase supply. If there are spare resources, for example in a recession there are lots of spare and unemployed resources, supply can be increased quickly.
3) Level of stocks-If goods can be stored, such as CDs, firms can stock them and increase market supply easily. If the goods are perishable, such as apples, firms cannot stock them for long so supply is more inelastic.
4)How substitutable factors are-If labour and capital are mobile, supply is more price elastic because resources can be allocated to where extra supply is needed. For example if workers have transferable skills, they can be reallocated to produce a different good and increase the supply of it.
5)Barriers to entry to the market- higher barriers to entry means supply is more price inelastic, because it is difficult for new firms to enter and supply the market.
