Supply Flashcards
What is the law of supply?
Producers suplly more goods and services, when they can sell them at higher prices and vice versa. Due to profit motive.
What are the non- price Determinats of supply?
Why should a company supply more of a product, even if the price does not changes? Assuming Ceteris Paribus (All of the things being equal)
- Cost of Resources
- Government Action
- Technology
- Price of Related goods
- Natural Events
- Expectations
Cost of resources (determinants of supply)
When there is an increase in the cost, there is a decrease in the profit, so the willigness to supply a product at the same price decreases.
Government action (Determinants of supply)
- Taxes (higher taxes, leads to less profit, less supply)
- Subsidies (lower costs, leads to more profit, more supply)
- Governement Regulation (higher costs, leads to less profit, so less supply)
Technology (Determinants of supply)
New technology, leads to less cost, more profit, more supply
Price of related goods (Determinants of supply)
- Competitive supply (producers need to decide what to produce)
Ex. skateboards and roller skates are competing for the factors of production - Joint supply (when a good is being prodcued, another good is produced at the same time as a “by-product”
Ex. produce petrol, diesel is produced as a by product
Natural events (Determinants of supply)
Marekts that are vulnerable to weather conditions, like agriculture. Wheater can have an impact on supply)
Expectations about future prices (Determinants of supply)
When producers expect the demand for their product to rise in the future, they may assume thath the higher demand will lead to higher prices. So they are going to store the product and withhold it from the market to profit from higher prices in the future.
If market reareach suggest that the demand for a prodcut will fall in the future, producers are likely to reduce supply.
What happens, when the supply curve shifts to the right (downwards)?
There is more being supplied. Maybe due to lower costs of production.
What happens when the supply curve shifts to the left (upwards)?
There is less being supplied. May be due to higher production costs or bad expectations about the future.
What is Elasticity of supply?
Measures how much the quanity supplied change when prices change.
What is Elastic supply?
There is a small change in price resulting in a large increase in the quantity supplied.
PES = bigger than one
Why is the supply for a product elastic?
- The product can be made quickly
- The product can be made inexpensively
- The product can be made using few, available resources
ex. T-Shirts
What is inelastic supply?
When a change in the price doesnt result in a change in the quantity supplied.
PES = bigger than zero but smaller than one
Why is the supply for a good inelastic?
When the production requires a lot of time, a lot of money and resourecs that are not readily available.
Ex. supply of gold –> difficult to mine
How is Elasticity of Supply calculated?
PES = %Change in the quanity supplied of a product /%Change in the price of the product
When is the supply of a product unit elastic?
When the PSE = 1. (45° angle)
What are the key factors that determine the Elasticity of Supply?
- unused capacity
- the time period considered (ex.pineapples)
- the ability to store stock
- how much costs rise as output increases
How is productivity measured?
With the law of diminishing returns.
Productivity increases with the increases in inputs only to a certain point.
Productivity increases are not infinite.
What is increasing marginal returns?
Productivity increases when an additional unit of input is being added.
What is decreasing marginal returns?
When the average productivity decreases as an additional unit of input is being added.
What is negative marginal returns?
When the overall productivity decreases as an additional unit of input is being added.
How is productivity being calculated?
Productivity = Total Output / Total Person hours
