Theory of supply Flashcards
Define supply
- willingness and ability of producers
- offer for a particular good for sale
- per period of time
Define quantity supplied
- amt of a good
- producers willing and able to offer for sale
- at each price
- over period of time
Define Law Of Supply
- higher price of a gd
- greater quantity supplied
Law of diminishing marginal returns (Positive relationship between price and quantity supplied)
- 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
Profitability (positive relationship between price and quantity supplied)
- higher price of gd, more profitable
- encourages firms to increase production
How law of supply is illustrated
- supply schedule
- supply curve (up-sloping cos of +ve relationship)
Individual supply schedule
- amt of good
- single producer
- willing and able to offer for sale at each price
- over period of time
Market supply schedule
- aggregate of all individual supply schedules for good
Market supply curve
- horizontal summation of all individual supply curves
- shows relationship btwn price of gd and qq supplied by ALL producers / sellers in market
- ceteris paribus
Change in qq supplied
- 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
Change in supply
- response to changes in non-price determinants of supply
- left/rightward shift in curve
Non-price determinants of supply
- Price of FOP
- State of tech
- Prices of other gds (competitive and joint supply)
- Gov policy (Taxes on goods/inputs, subsidies for producers)
- Expected price prices
- Number of sellers
Price of FOP (NPD)
- 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
Example of price of FOP (NPD)
- African Swine Flu
- pig farmers affected
- mass killing of pigs, lesser pork available
- price of pork rises (raw material)
- supply of bakkwa falls
State of tech (NPD)
- 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
Price of other goods (Competitive supply) (NPD)
- 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)
Price of other goods (joint supply) (NPD)
- 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)
Gov policy (Taxes on goods/Inputs) (NPD)
- tax raises COP, reducing supply of good
- specific tax vs ad valorem tax
Specific tax (Gov policy) (NPD)
- 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
Ad valorem tax (Gov policy) (NPD)
- 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)
Graph for taxes (take note) (NPD)
vertical distance between old and new supply curves = at of tax (t) levied per unit output
Subsidies for producers (Gov policy) (NPD)
- 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
Expected future prices (NPD)
- 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
Number of sellers (NPD)
- more producers when industry is profitable
- market supply of gd will rise at all price levels
- SS curve rightward shift
- vice versa
