Theme 1 - 1.2.2 - Supply Flashcards
What is the definition of supply ?
Supply is measured in terms of the quantity of a good or service that a producer is willing and able to make available on the market, at a given price, over a given period of time
How does price determine the levels of supply ?
• Price and supply are related
• As a price paid by customers increases on a product or service, normally, a business will want to supply more, in anticipation of higher profits
How does cost of production determine the level of supply ?
•If the costs of production increases e.g. due to a rise in the cost of raw materials or due to a rise in the minimum wage:
• The business may decide to produce less
• Prices may have to go up
• The product will have lower sales and therefore lower revenue
How does introduction of new technology determine supply ?
• New technology means that more goods can be supplied
• Mechanisation and automation of production processes means supply can increase
• Mass production methods improved to increase capacity
• Using new technology means that costs can be reduced and that means that they can offer lower prices to the customer to drive up demand
How does indirect taxes determine supply ?
• When the government increases tax on goods such as petrol then supply will decrease
• VAT / Customs tax / Excise tax are all indirect taxes and when applied to goods it makes supplying them less attractive. This can lead to a decrease in supply
How does government subsidies determine supply ?
• This is a payment from the government to encourage more suppliers to enter the market and to supply more. With a subsidy there is an increase in supply because costs have been lowered thanks to the subsidy
• For example the Government pays subsidies to wind farm manufacturers to erect turbines offshore in the UK. This adds about £18 a year to a UK householder’s energy bill
How do external shocks determine supply ?
External shocks may mean that the business may not want to supply at current levels, these shocks may be:
• Changes in oil price which can affect transport costs
• War, a business may not want to supply goods to a country which is at war
• Weather problems – particularly for crops
• Changes in labour laws (e.g. length of working week or minimum wage)
