supply and elasticity of supply Flashcards
what is supply?
the quantity of supply that firms are willing to give at any price for a period of time
what are the 4 types of firms?
- sole trader
- partnership
- private limited
- public limited
what do we assume firms do?
aim to maximize profit
what is the formula for profit?
profit = total revenue - total cost
what factors influence supply?
- production cost (labour cost)
- technology of production
- taxes and subsidies
- price of related goods
- firms expectations of future prices
(all cause a shift in the supply curve) - government legislation: adding or removing laws may add cost and time
- the weather (especially in agriculture)
what are joint supply goods?
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.
what are the characteristics of the supply curve?
- 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
what is the formula for PES?
PES = % change in quantity supplied / % change in price
(is assumed to be a positive value)
what does PES tell you?
- 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%
what do private and public limited firms do to protect owners?
separate the business debt from the owner
where are shared sold in public limited firms?
on the stock market
why may firms decide to not respond to price changes?
- if they expect price change to be temporary
- if it’s not worth investing in organizing overtime, rent new buildings, or buying new machinery
why may firms decide to respond to price changes?
- if they expect price change to be permanent
- if they can respond quickly and easily
what firms may not be able to respond quickly?
- 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
what firms are able to respond quickly?
- 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
what is perfectly inelastic supply?
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.
what is a perfectly elastic supply?
firms are prepared to supply any amount of goods to respond to any change in price. zero.
what is short-run supply?
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
what is long-run supply?
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
what is holding stock and why is this beneficial?
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
why would a firm switch production to another good?
if the price of the other good rises, to maximize profits
why can’t firms influence the price of a good or service?
due to competition from other firms, if their price rises then consumers will just go to alternative firms with cheaper goods
what are marginal costs?
the cost of producing one extra unit of output
what is the law of diminishing marginal returns?
when one factor of production is fixed, the additional units of input provide less extra output
