Supply, PES, joint supply

Question 1

Define supply.

Answer 1

The quantity of a good/service that producers are willing and able to produce for a given price in a given time period.

Question 2

What is the ‘Law of Supply’.

Answer 2

There is a direct relationship between price and quantity supplied. As price increases, Qs increases and vice versa, assuming ceteris paribus.

Question 3

Why do suppliers want a higher price, when quantity increases?

Answer 3

Costs of production go up - suppliers need to cover the costs of production.

Question 4

What are the factors that shift supply?

Answer 4

PINTS WC
Productivity
Indirect Tax
Number of firms
Technology
Subsidy
Weather
Costs of production

Question 5

Define PES

Answer 5

Price Elasticity of Supply measures the responsiveness of quantity supplied given a change in price.

Question 6

What is the equation for PES?

Answer 6

% change in Qs/ % change in P

Question 7

PES is always…

Answer 7

positive.

Question 8

PES:

> 1 means…

Answer 8

supply is price elastic - for any price change, the change in Qs will be proportionately greater than chance in price.

Question 9

PES:

< 1 means…

Answer 9

supply is price inelastic - when the price changes, Qs will change but proportionality less than the price change.

Question 10

PES:

0 means…

Answer 10

supply is perfectly price inelastic - regardless of the change in price, Qs will never change.

Question 11

PES:

Infinity means…

Answer 11

supply is perfectly price elastic.

Question 12

PES:

1 means…

Answer 12

supply is unit price elastic.

Question 13

PES:

A steep supply curve means supply is…

Answer 13

price inelastic.

Question 14

PES:

A shallow supply curve means supply is…

Answer 14

price elastic.

Question 15

What factors cause supply to be price elastic and price inelastic?

Answer 15

PSSST:
Production Lag - the longer the production lag, for a a good/service, the more price inelastic supply is
Stocks - the larger the level of stocks, the price elastic supply is
Spare capacity - the more price elastic supply if there is more spare capacity
Substitutability of FoPs - the more substitutable FoPs are, in a firm, the more price elastic supply is.
Time - in the short run, supply is price inelastic, whereas in the long run supply is price inelastic - in the short run there is at least one fixed factor of production, therefore it is difficult to increase production

Question 16

Define joint supply.

Answer 16

The increase in production of one good will increase the supply of another good, due to the other being a by-product of the first good producer - or the second good relies on the first good in order to be produced.