Supply Flashcards
Define Supply.
The quantity of a product that producers or firms are able and willing to sell at a given price in a set period of time.
Describe the supply curve.
The supply cure is upward sloping form left to right showing a positive (not inverse) relationship between price and the quantity that the producer is prepared to sell at each price level.
Why does quantity supplied extend when price rises? Give two reasons.
When price rises:
1) Existing suppliers will produce more ( and therefore make more units of the product available to consumers) as they can make more profit when price is higher. This is because even if costs of production are higher, total revenue will rise when demand is price inelastic.
2) New less cost-efficient suppliers will step into the market when price is higher in order to make a profit. At a higher price, these producers can now at least pay for their production costs, which they couldn’t do at lower prices.
Why does the quantity supplied contract when price rises? Give two reasons.
As price falls the quantity that producers are able and willing to sell falls.
As a result:
1) Existing producers (suppliers) are no longer making as much profit, as costs of production are often fairly constant but total revenue is falling.
2) New producers’ costs, would be much higher than their total revenue. Therefore they’re likely to make a loss rather than a profit so would exit the market, leading to a decrease in the total (market) supply.
Which type of shift in the supply curve would show an increase in the supply of the product?
What may have caused this?
A rightward shift in the supply curve shows an increase in the supply of a product at each and every price level. This shows the effect of a change in one of the conditions of supply other than price.
Which type of shift in the supply curve would show an decrease in the supply of the product?
What may have caused this?
A leftward shift in the supply curve shows a decrease in the supply of a product at each and every price level. This shows the effect of a change in one of the conditions of supply other than price.
Define PES.
Price elasticity of supply is the responsiveness or sensitivity of the supply for a product to a change in price.
Describe the effect of a proportionate rise or fall in the price of a product, the supply for which is price elastic.
The supply of a product is elastic when a percentage or proportionate rise or fall in the price of the product cause a bigger percentage or proportionate extension or contraction in the quantity supplied.
Describe the effect of a proportionate rise or fall in the price of a product, the supply for which is price inelastic.
The supply of a product is price inelastic, when a percentage or proportionate rise or fall in its price causes a smaller percentage or proportionate extension or contraction in the quantity supplied.
Give seven determinants of PES.
1) Time
2) Stocks
3) Availability of spare capacity in the firm/industry.
4) Perishability of a product
5) The state of the economy
6) The availability of substitutes (in resources)
7) Ease of entry into an industry
Explain how time can affect PES.
Short run and long run
PES is likely to vary over time, in the economic short run, at least one factor of production is likely to be fixed (usually capital is fixed in quantity). Therefore in the short run it is often difficult for producers to extend supply when price rises, making the supply of the product price inelastic. In the economic long run, all factors of production are variable in quantity. In the long run, supply is likely to be more price elastic as the producer can use more units of the factors of production.
Explain how stocks can affect PES.
Give an example for each
If stocks of finished products are available, when price rises, supply will tend to be relatively elastic because manufacturers or farmers can respond quickly to a change in price (e.g. car manufacturers have stockpiles of finished cars waiting to be sold).
If stocks of products are not available, supply will tend to be relatively inelastic, because manufacturers or farmers are unable to respond quickly to a change in price. (e.g. tailor made suits).
Explain how the availability of spare capacity in the firm or industry can affect PES.
If a company has under-utilised resources such as workers or capital, when there is a percentage rise in price, there would be a bigger proportionate extension of supply (i.e the supply of the product is price elastic).
If a company has fully utilised all their resources, when there is a percentage rise in price, there would be a smaller percentage extension of supply (i.e the supply of the product is price inelastic).
Explain how the perishability of a product can affect PES.
Some products cannot be stockpiled, e.g. fruit and veg due to their perishability. These products are typically price inelastic in their supply because farmers or producers cannot respond quickly to a change in price.
On the other hand manufactured goods tend to be non-perishable, so they are often stockpiled. These goods are typically price elastic in supply, because producers are better able to respond quickly to a change in price.
Explain how the state of the economy can affect PES. (In both recessions and boom periods)
In a recession, there are many unemployed resources. Therefore there is a high level of spare capacity in the economy, which means firms find it fairly easy to extend supply in response to increases in prices. Therefore the supply of the product tends to be more price elastic.
The opposite applies during a period of boom or rapid growth as there are few unemployed resources in the economy. Therefore when price rises it is not possible to raise supply by a larger percentage than the percentage rise in price. This means that the supply of products is more price inelastic.
