supply and elasticity of supply

Question 1

what is supply?

Answer 1

the quantity of supply that firms are willing to give at any price for a period of time

Question 2

what are the 4 types of firms?

Answer 2

1. sole trader
2. partnership
3. private limited
4. public limited

Question 3

what do we assume firms do?

Answer 3

aim to maximize profit

Question 4

what is the formula for profit?

Answer 4

profit = total revenue - total cost

Question 5

what factors influence supply?

Answer 5

1. production cost (labour cost)
2. technology of production
3. taxes and subsidies
4. price of related goods
5. firms expectations of future prices
   (all cause a shift in the supply curve)
6. government legislation: adding or removing laws may add cost and time
7. the weather (especially in agriculture)

Question 6

what are joint supply goods?

Answer 6

when firms produce a variety of products, where 1 product is a by-product of another, the price and supply changes of both goods will be the same.

Question 7

what are the characteristics of the supply curve?

Answer 7

• positive relationship
• as price increases, firms are more likely to increase the quantity supplied
• shift to the left = decreased supply
• shift to the right = increased supply
• the ‘price’ is the amount of money consumers are willing to pay

Question 8

what is the formula for PES?

Answer 8

PES = % change in quantity supplied / % change in price
(is assumed to be a positive value)

Question 9

what does PES tell you?

Answer 9

• how quickly and easily a firm can respond to changes in price by changing supply
  e.g. if PES is 0.8, when the price increases by 10%, the quantity of supply increases by 8%

Question 10

what do private and public limited firms do to protect owners?

Answer 10

separate the business debt from the owner

Question 11

where are shared sold in public limited firms?

Answer 11

on the stock market

Question 12

why may firms decide to not respond to price changes?

Answer 12

• if they expect price change to be temporary
• if it’s not worth investing in organizing overtime, rent new buildings, or buying new machinery

Question 13

why may firms decide to respond to price changes?

Answer 13

• if they expect price change to be permanent
• if they can respond quickly and easily

Question 14

what firms may not be able to respond quickly?

Answer 14

• house building firms because it takes a long to increase supply due to getting planning permission, land, and actually finishing buildings
• PES will be low

Question 15

what firms are able to respond quickly?

Answer 15

• t-shirt manufacturing firms as they can easily turn on more machines, leave machines running for longer, and pay workers overtime for extra shifts
• PES will be high

Question 16

what is perfectly inelastic supply?

Answer 16

when a firm can’t supply more of a good no matter how much the price changes, the supply of the good is fixed. infinity.

Question 17

what is a perfectly elastic supply?

Answer 17

firms are prepared to supply any amount of goods to respond to any change in price. zero.

Question 18

what is short-run supply?

Answer 18

generally inelastic, where firms are limited in how they respond to price changes as this is the time where one factor of production can be fixed

Question 19

what is long-run supply?

Answer 19

generally elastic, where firms can flexibly respond to price change as this is the length of time where all factors of production can be fixed

Question 20

what is holding stock and why is this beneficial?

Answer 20

where firms produce goods and stockpile them, holding back supply if they expect future prices to be higher, so will wait until then to generate more revenue and maximize profit

Question 21

why would a firm switch production to another good?

Answer 21

if the price of the other good rises, to maximize profits

Question 22

why can’t firms influence the price of a good or service?

Answer 22

due to competition from other firms, if their price rises then consumers will just go to alternative firms with cheaper goods

Question 23

what are marginal costs?

Answer 23

the cost of producing one extra unit of output

Question 24

what is the law of diminishing marginal returns?

Answer 24

when one factor of production is fixed, the additional units of input provide less extra output