Supply

Question 1

Define Supply

Answer 1

Supply shows how much producers are able and willing to sell at each price level. It is influenced by many different factors, but supply and price is the main one we are interested in.

Question 2

What important assumptions are made about the supply curve?

Answer 2

• Firms do not set their own prices
• Firms wish to maximise their profits
• In short term, increasing output or production becomes more difficult, hence the cost of an extra (marginal) unit rises
• Rising prices gives producers incentive to produce more
• The principle of diminishing returns (willing to pay more for the first unit than the fifth unit)

Question 3

What will happen to supply if price increases?

Answer 3

Supply will increase.

Suppliers will not increase supply without an increase in price as they will not be able to cover costs, even if demand is present. demand does not create supply.

Therefore, the supply curve will slope upwards - Quantity supplied is positively correlated with price.

Question 4

What causes movement along a supply curve?

Answer 4

A movement along the supply curve is caused solely by a change in price, Ceteris Paribus

Question 5

What causes a shift in a supply curve?

Answer 5

A shift in a supply curve can only be caused non-price factors.

Question 6

Name 3 non-price factors of supply

Answer 6

• Availability of factors (e.g. raw materials)
• Cost of factors
• Technology
• Taxes
• Subsidies
• Weather and natural factors
• Demand
• Compliment demand
• Productivity
• Competition prices
• Join supply

Question 7

Define joint supply

Answer 7

Referring to a product of process that can yield two or more outputs. For example:

Cow - Meat, Milk, Leather
Sheep - Sheep skin, meat, wool

Question 8

Define competitive supply

Answer 8

Where more than one product can be produced from the same factors of production (CELL):

Land - Food = crops, animals
- Bio-fuels

Question 9

What is fixed capacity?

Answer 9

Where supply cannot increase. For example, an event such as a concert. Price will generally increase closer to the event.

A supply curve with fixed capacity will have a vertical curve.

Question 10

What does a horizontal supply curve represent?

Answer 10

When the amount supplied does not affect price because there e are no additional costs to supply, for example, downloading music.

Question 11

What is the principle of diminishing returns?

The law of diminishing marginal returns

Answer 11

If one variable input (factor of production) is the production of a commodity is increased while all other inputs are held in ceteris paribus a point will eventually be reached at which additions of the input create progressively smaller (diminishing) increases in output.

Not total production, but additional (marginal) output is decreasing.