Theory of supply Flashcards

1
Q

Define supply

A
  • willingness and ability of producers
  • offer for a particular good for sale
  • per period of time
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2
Q

Define quantity supplied

A
  • amt of a good
  • producers willing and able to offer for sale
  • at each price
  • over period of time
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3
Q

Define Law Of Supply

A
  • higher price of a gd

- greater quantity supplied

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4
Q

Law of diminishing marginal returns (Positive relationship between price and quantity supplied)

A
  • increasingly more workers need to be employed to obtain each additional unit of input
  • some fop are fixed factors, cannot increase in short run ie. land
  • need variable factors like labour to increase output
  • more variable factors added to fixed factors, too many getting into each others way
  • contribution to total output per worker decreases
  • Cost of producing each additional unit of output rise
  • higher price must be offered so that producer increases quantity supplied of gd
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5
Q

Profitability (positive relationship between price and quantity supplied)

A
  • higher price of gd, more profitable

- encourages firms to increase production

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6
Q

How law of supply is illustrated

A
  • supply schedule

- supply curve (up-sloping cos of +ve relationship)

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7
Q

Individual supply schedule

A
  • amt of good
  • single producer
  • willing and able to offer for sale at each price
  • over period of time
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8
Q

Market supply schedule

A
  • aggregate of all individual supply schedules for good
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9
Q

Market supply curve

A
  • horizontal summation of all individual supply curves
  • shows relationship btwn price of gd and qq supplied by ALL producers / sellers in market
  • ceteris paribus
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10
Q

Change in qq supplied

A
  • refers to change in amt that producers are willing and able to offer for sale
  • due to change in price of gd
  • movement along curve
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11
Q

Change in supply

A
  • response to changes in non-price determinants of supply

- left/rightward shift in curve

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12
Q

Non-price determinants of supply

A
  1. Price of FOP
  2. State of tech
  3. Prices of other gds (competitive and joint supply)
  4. Gov policy (Taxes on goods/inputs, subsidies for producers)
  5. Expected price prices
  6. Number of sellers
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13
Q

Price of FOP (NPD)

A
  • price of FOP rise (WRIP), COP rise
  • keeping price of gd constant, higher average COP, lesser profits per unit output
  • producer reduce supply of gd
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14
Q

Example of price of FOP (NPD)

A
  • African Swine Flu
  • pig farmers affected
  • mass killing of pigs, lesser pork available
  • price of pork rises (raw material)
  • supply of bakkwa falls
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15
Q

State of tech (NPD)

A
  • improvement in tech, more output produced with same amt of resources
  • supply of good increase at each and every price - SS curve shifts right
  • tech cannot deteriorate
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16
Q

Price of other goods (Competitive supply) (NPD)

A
  • 2 goods that use same types of inputs e.g. wheat and corn on same plot of land
  • supply of one good inversely related to price of the other
  • rise in price for one good (more profitable) leads to fall in supply (shift of resources)
17
Q

Price of other goods (joint supply) (NPD)

A
  • supply of one good leads to simultaneous production of another good e.g. beef and hide (produced tgt)
  • rise in price of one gd lead to rise in supply of the other
  • e.g. rise in price of beef, qq supplied of beef rise (upward movement), increase in supply of hide (rightward shift)
18
Q

Gov policy (Taxes on goods/Inputs) (NPD)

A
  • tax raises COP, reducing supply of good

- specific tax vs ad valorem tax

19
Q

Specific tax (Gov policy) (NPD)

A
  • fixed amt of tax levied on every unit of good sold e.g $1
  • producers reduce supply of gd (when specific tax is imposed on gd)
  • leftward shift
20
Q

Ad valorem tax (Gov policy) (NPD)

A
  • imposed as a fixed percentage of price of gd
  • e.g. GST 7% in SG
  • tax is in % terms, amt of tax per unit output increases as price increases
  • distance between initial supply curve and new supply curve gets wider (not parallel)
21
Q

Graph for taxes (take note) (NPD)

A

vertical distance between old and new supply curves = at of tax (t) levied per unit output

22
Q

Subsidies for producers (Gov policy) (NPD)

A
  • subsidy = grant given by gov to producers to help them cover part of COP
  • lowers COP, producers willing and able to produce&sell more at same price
  • ss curve shifts right as supply increases
  • vertical distance between 2 supply curves= amt of subsidy per unit of output
23
Q

Expected future prices (NPD)

A
  • producers expect price to rise
  • temporarily reduce amt they sell
  • build up stock, acquire new capital gds (e.g machines,, increase labour
  • so that can be ready to supply more when price rise
  • Supply decreases in current time period leftward shift
24
Q

Number of sellers (NPD)

A
  • more producers when industry is profitable
  • market supply of gd will rise at all price levels
  • SS curve rightward shift
  • vice versa