1.2.4 Supply, 1.2.5 Elasticity of supply

Question 1

Define Supply

1.2.4

Answer 1

The quantity of a good or service that producers are willing and able to sell at any given price in a given period of time.

Question 2

Define firm

1.2.4

Answer 2

An organisation that brings together FoP and organises the production process, in order to produce output.

Question 3

Assumptions about firms

1.2.4

Answer 3

When deciding how much to supply, economists assume firms behave rationally by maximising profits.
Profits defined as the difference between a firm’s total revenue and its total costs.

They do this by increasing price or reducing price costs.
Firms are looking for the maximum level of profit from each unit of a good or service produced.

Question 4

Different forms firms can take

1.2.4

Answer 4

Sole proprietor - the owner of the firm also runs the firm e.g. small business (newsagents)

Partnership - profits and debts are shared between the partners in the business

Private/public joint-stock company - owned by shareholders.
Difference between private & public - shares of a public joint-stock company traded on the stock exchange, not the case for private.

Question 5

Define supply curve

1.2.4

Answer 5

A graph showing the quantity supplied at any given price

Question 6

Define competitive market

1.2.4

Answer 6

A market in which individual firms cannot influence the price of the good or service they are selling because of competition from other firms.

Question 7

Why is the supply curve upward sloping?

1.2.4

Answer 7

Firms are assumed to supply more goods at a higher price than at a lower price to increase their profits, ceteris paribus. This means the supply curve will be upward sloping and there is a direct relationship between quantity supplied and price.

In competitive markets, as price rises, rational profit maximising producers will supply more because profits should rise, ceteris paribus. This can also send a signal to other firms to enter the market where super normal profits are being made - increasing market supply.

Question 8

What leads to a movement along the supply curve?

1.2.4

Answer 8

Change in the price.
Increase in P creates an extension
Decrease in P creates a contraction.

Question 9

Who can the supply curve be for?

1.2.4

Answer 9

An individual firm or for all firms in the market.

Individual - supply curve shows the amount that an indidividual firm is able and willing to supply at any given price in any given period of time.

All - shows the total amount of a good/service firms are willing and able to supply at any given price in a given time period.

Question 10

What is marginal cost and how does it relate to the supply curve?

1.2.4

Answer 10

The cost of producing one additional unit.

In a competitive market, the supply curve reflects the marginal cost. In competitive markets, firms are price takers.

Question 11

Price takers vs price makers
Which are firms in competitive markets?

1.2.4

Answer 11

In competitive markets, firms are price takers.

Price takers must accept the prevailing market price and sell each unit at the same market price. Price takers are found in perfectly competitive markets.

Price makers are able to influence the market price and enjoy pricing power. Price makers are found in imperfectly competitive markets e.g. monopoly.

Question 12

What leads to a shift in the supply curve?

1.2.4

Answer 12

The conditions of supply.
An outward/right shift occurs when firms supply more, even at the same price.
Inward shift when firms cannot supply as much at each price level.

Question 13

What are the conditions of supply?

1.2.4

Answer 13

1. Production costs
2. Technology of production
3. Gov subsidies, regulations and indirect taxes (specific & valorem)
4. Exchange rate changes
   e. g. depreciation increases the price of imports of raw materials, components etc.
5. Substitutes prices - supplied using same FoP e.g. As price of organic swede increases, farms may switch from producing potato.
6. Number of sellers.
   As a new firm enters the market, supply inc. putting downward pressure on prices if firm change from profit maximisation to market share growth.
7. Firm’s expectations on future prices

Question 14

Define cartel

1.2.4

Answer 14

An agreement between firms in a market on price and output with the intention of maximising their joint profits.

Firms are using their market power to influence the supply of a commodity. Oil industry - exporting nations work together as a cartel to influence QS.

Question 15

Define price elasticity of supply

1.2.5

Answer 15

Measures the sensitivity of quantity supplied to a change in price.
Formula:
PES = % change in Qs / % change in P

PES always +Ve
As P increases, Qs increases

Question 16

Define perfectly inelastic supply

1.2.5

Answer 16

0
No response in Qs to a change in P.
A situation in which firms can only supply a fixed quantity so cannot increase or decrease the amount available.

Question 17

Define relatively inelastic supply

1.2.5

Answer 17

0 to 1

Less than proportionate response in Qs to change in P

Question 18

Define unitary elastic supply

1.2.5

Answer 18

1

% change in Qs = % change in P

Question 19

Define relatively elastic supply

1.2.5

Answer 19

1 to Infinity

More than proportionate response in Qs to change in P

Question 20

Define perfectly elastic supply

1.2.5

Answer 20

Infinite
Producers are prepared to supply any amount at a given price.
A situation in which firms will supply any quantity of a good at the going price.

Question 21

Example of perfectly inelastic supply and perfectly elastic supply

1.2.5

Answer 21

Inelastic:
Fixed amount of fish in the sea. Unable to catch anymore i.e. supply anymore.

Elastic:
If fish cannot be stored for another day, incentive to sell all the fish at any price.

Question 22

Determinants of elasticity of supply

1.2.5

Answer 22

1. Sustitutability of FoP
2. Spare capacity
3. Stock levels
4. Time taken to produce
   (Short-run/Long-run)

Is it costly to store/perishable? If possible to hold stocks of the good - allows them to expand sales in short run even if it takes time to expand production.

Question 23

PES short-run/long-run

1.2.5

Answer 23

PES in short-run/long-run
Short-run firms are unable to vary their inputs of all FoP. May be able to vary amount of labour input but not capital.
Long-run more flexible

Higher price but firms may choose to wait to see if it is temp or perm change.
If change immediately - takes time to adjust.
Obtain new machinery or other equipment, more skilled labour etc.

Question 24

Do firms want to keep supply inelastic or elastic?
Why and how can they do this?

1.2.5

Answer 24

Elastic so can respond quickly to changes - if Qd & P increase, the firm can increase profit by supplying more.

Can do this by:

• Shorten length of production lag
  e. g. up to date technology, better quality machinery, more workers & better trained workers.
• Increase stock levels
  e.g. increase storage facilities, buy new warehouse.
  Can lengthen life of goods e.g. agricultural products so can be stored longer & released to market when needed.
• Increase spare capacity
  e. g. investing in more office space or a new factory, increase car fleets or a number of machines.
• Increase the substitutability of FoP where a business produces two or more goods
  e. g. multi-purpose machinery or train workers to produce multiple goods/offer multiple services.

Question 25

Define production lag

1.2.5

Answer 25

Time to increase production to respond to change in P or Qd

Question 26

Examples of inelastic supply irl

1.2.5

Answer 26

UK housing due to large production lags & tight planning permission regulation (Boris J eased in 2020 to speed up building) which were preventing quick increases in supply to meet demand.

UK Energy due to limited stocks & closing of environmentally unfriendly power plants which has reduced capacity.