THE DETERMINANTS OF THE SUPPLY OF GOODS AND SERVICES Flashcards
Define supply.
The quantity of a good/service that producer supply to a market at a given price at a particular time.
Why does a supply curve usually slope upwards?
Since firms aim to maximize their profits a higher price of a good results in higher profit which gives an incentive to expand production and increase supply.
What is joint supply?
When production of one good involves the production of another.
Define Price elasticity of supply.
PES is a measure of how the quantity supplied of a good responds to a change in its price.
What is the formula for PES?
Percentage change in supply over the percentage change in price.
Is PES usually positive or negative?
PES is normally positive since the higher the price the higher the supply.
What is an elastic value of PES?
Greater than 1.
What is a inelastic value of PES?
Between 1 and 0.
What is the unit elasticity of supply?
1
Why is a high PES important to Firms?
Firms aim to respond quickly to changes in price and demand therefore a high elasticity of supply is important.
What are some measures that a firm can take in increase the elasticity of supply? 2.
Flexible working patterns and spare production capacity.
Why is supply price inelastic in the short run?
Capital is often the factor of production fixed in the short run since it takes time to build more production facilities.
What makes supply elastic in the long run?
All factors of production are variable in the long run so a firm is able to increase capacity.
What are the two main factors affecting PES?
Perishable goods have an inelastic supply since long term storage is difficult.
Stock levels.
What is derived demand?
When the demand of a good is a result of another good which uses said good in production.
