What Determines Supply

Question 0

Why does supply curve slope upwards?

Answer 0

1) As price rises , it encourages firms to supply more of a good to make more profit
2) as firms raise output in short run , they face production costs ,
to cover the rising costs firms need to charge higher prices

Question 1

Supply

Answer 1

Quantity of good/ service that firms are willing to sell at given price over given period of time

Question 2

Causes of shifts in supply curve

Answer 2

1) Improvements in technology
2) Reduction in labour costs
3) Reduction on capital costs
4) reduction in transport costs
5) discovery of new resources
6) increase in number of firms
7) increase in gov subsidies
8) reduction of indirect taxation
9) joint supply
10) number of producers in market

Question 3

Price elasticity of supply

Answer 3

Responsiveness of supply of good to change in price

PES= % change in supply of good / % change in price of good

Question 4

If PES is greater than 1

Answer 4

Good is price elastic - % change in supply is greater than the % change in price

Question 5

If PES is less than 1

Answer 5

Good is price inelastic - % change in supply is less than % change in price

Question 6

If PES = 0

Answer 6

Good is unit elastic - % change in supply is the same as % change in price

Question 7

PES = 0

Answer 7

Good is perfectly inelastic - change in price has no effect on quantity supplied - supply curve is vertical

Question 8

PES is infinite

Answer 8

Good is perfectly elastic - supply curve is horizontal

Question 9

Determinants of price elasticity of supply

Answer 9

1) Level of spare capacity - high- can raise production quickly and so supply is elastic
2) State of economy- in recession there are many unemployed resources so there is high spare capacity - relatively easy to increase supply
3) Level of stocks of finished goods in a firm- high level of stocks = increase supply quickly so supply is elastic
4) Perishability - some goods can be stockpiles and some cannot
5) Ease of entry into industry - if there are high entry barriers then it will be more difficult form firms to enter and so supply will be restricted and inelastic
6) Time period - short run - at least one of the factors of production will be fixed in quantity so supply will be relatively inelastic but factors of production are variable in long run so it is easier to increases supply and so it elastic
7) Mobility of labour