Supply

Question 1

Definition of supply

Answer 1

Willingness and ability to supply goods/services at every price

Question 2

PES formula

Answer 2

% change in QS / % change in price

Question 3

Shift in supply definition

Answer 3

An increase or decrease in the quantity supplied at every price

Question 4

Examples of causes of a shift in supply

Answer 4

• Changes in the costs of production
• Technology improvements
• Changes to the productivity of FOP’s
• Indirect taxes of subsidies
• Number of suppliers

Question 5

What is joint supply?

Answer 5

The production of one good involves the production of another or several others - It’s an example of interrelated markets

For example, if crude oil is refined to make petrol, the supply of butane is also increased as it’s also a product of refining crude oil

Question 6

PES definition

Answer 6

A measure of how QS of a good responds to a change in its price

Question 7

What is the law of supply?

Answer 7

As the price increases, the QS increases (and vice versa)

Question 8

What does elastic supply mean?

Answer 8

The QS is very responsive to a change in price (% change in QS > % change in price)

Question 9

What does inelastic supply mean?

Answer 9

The QS is not very responsive to a change in price (% change in price > % change in QS)

Question 10

What PES values are inelastic and elastic?

Answer 10

Elastic - When ignoring the minus sign, PES is greater than one (The higher the value of PES the higher the elasticity
Inelastic - When ignoring the minus sign, PES is between 0 and 1

Question 11

Perfectly inelastic and perfectly elastic supply meaning

Answer 11

Perfectly Inelastic - PES of 0 and any change in price has no effect on quantity supplied
Perfectly Elastic - PES of + or - infinity and any fall in price means quantity supplied will fall to 0

Question 12

What is unit elasticity + diagram?

Answer 12

% change in QS = % change in price

Diagram is the standard 45 degree supply curve

Question 13

Why is a high PES important for firms?

Answer 13

Firms aim to have a high PES in order to have elastic supply, this is in order to make sure QS responds quickly to a change in price.

Measures taken to improve the elasticity of supply, such as flexible working patterns and spare productive capacity, can help a firm quickly increase its supply without increasing costs (such as the cost of building a new factory to increase productive capacity). This means the increase in revenue from the increase in market price can be added into the equation profit = total revenue - total costs, maximising profit for the firm.

Question 14

Why is supply price inelastic in the short run?

Answer 14

Firms find it difficult to switch production from one good to another.

In the short run, firms an recruit more labour, buy more materials, but it takes time to build additional production facilities. This means that capital is often fixed in the short run, meaning firms find it difficult to increase production, so supply in the short run is inelastic

Question 15

Why is supply more elastic in the long run?

Answer 15

In the long run, all the FOP’s are variable, so in the long run, firms have longer to react to changes in price and demand, so they are able to easily increase its capacity. Therefore, the supply curve is elastic

Question 16

What factors affect PES?

Answer 16

• During periods of unemployment, firms have a more elastic supply curve as labour is easy to attract if a firm wishes to expand.
• Firms selling perishable goods, e.g. fruits and veg, have an inelastic supply curve as they cannot be stored for very long
• Firms with high stocks levels often have elastic supply, they can easily increase supply if they wanted to
• Industries with more mobile factors of production, e.g. easily relocatable capital or industries that employ lots of unskilled labour, have more elastic supply as the factors of production are variable.