Supply Flashcards
What is supply?
Supply is the willingness and ability of producers to produce a quantity of a good or service at a given price in a given time period.
What does the theory of supply state?
It states there id a positive relationship between price and the quantity supplied by firms and producers. At higher prices firms will usually supply a larger quantity than at lower prices. The theory assumes ceteris paribus.
What does the supply curve show?
It shows the quantity that producers plan to sell at each price.
Why does the supply curve slope upwards?
1) Incentive of profits: The higher the price the more profits firms hope to make.
2) Costs: A higher price means that more inefficient producers (i.e. those with higher costs) can enter the market as higher price will now cover their costs.
What happens to the supply curve if there is a change in supply due to any factors other than price?
1) The curve will shift to the left if the supply decreases.
2) The curve will shift to the right if supply increases.
What are the non- pricing factors that can cause a change in supply?
1) Changes in the cost of production: The lower the costs the greater the profits and the firm can and will produce ceteris paribus.
2) Profitability of alternative products: If a substitutes in supply becomes more profitable firms will swap production to it.
3) Joint supply: A good is in joint supply with another good if it has two or more uses e.g. cows are used for leather and beef. Therefore an increase in the supply of beef increases the supply of leather too.
4) Composite demand: Goods are in composite demand when they are demanded two or more purposes e.g. milk is used to make cheese cream, yoghurt and butter. Therefore, an increase in demand for cheese could mean less yoghurt supplied.
5) Random shocks: Strikes, weather, wars, terrorist attacks and earthquakes reduce the ability of producers to supply goods and services.
6) Speculation and expectations of future price changes: If a firm expects prices to rise of its goods or commodities to rise in the future it will hold onto its stock now and release to the market at a later date.
What does ceteris paribus mean?
All other things remain the same/ equal.
