THEME 1 - Topic 3 - The Nature of Supply Flashcards
Define supply
The quantity of a good/service that firms choose to sell at any possible price in a given period.
Define a firm
An organisation that brings together factors of production in order to produce output and to maximise profits.
Define the law of supply
States that a higher quantity of a good/service will be supplied at a higher price, ceteris paribus.
Define the supply curve
A graph showing the quantity supplied of a good/service at any given price.
Define a movement along the supply curve
When a change in price affects the quantity supplied of a good/service.
Define a shift in the supply curve
When there is a change in one of the determinants of supply of a good/service.
What are the determinants of supply?
PINTSWC
Productivity
Indirect tax
Number of firms
Technology
Subsidy
Weather
Costs of production
Define price elasticity of supply (PES)
A measure of the responsiveness of quantity supplied of a good/service to a change in its price.
What is the formula for PES?
% Change in quantity supplied
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% Change in price
Define price elastic in supply
When the change in quantity supplied results in a more proportional change in price.
Define price inelastic in supply
When the change in quantity supplied results in a less proportional change in price.
Define unitary price elastic in supply
When the percentage change in quantity supplied is exactly equal to the percentage change in price.
What are the determinants of PES?
PSSST
Production lag
Stocks
Spare capacity
Substitutability of FoPs
Time
What is the value of PES if it’s price elastic in supply?
Greater than +1 but less than infinity.
What is the value of PES if it’s price inelastic in supply?
Less than +1 but greater than 0.
