1.3 The Nature of Supply

Question 1

What is supply and the law of supply?

Answer 1

Supply is the quantity of a good or service producers are willing and able to supply at a given price in a given time period

The law of supply states that as prices rise, businesses will be incentivised to expand supply. Market supply is the total brought to the market by producers at each price.

Question 2

What are the reasons for the law of supply?

Answer 2

• Profit motive
• Production costs rise when outputs expand so higher prices needed
• New entrants to the market may mean competition.

Question 3

What causes a shift in supply curve?

Answer 3

Productivity 
Indirect taxes (regulations)
Number of firms in the market
Technological advancements
Subsidies

Weather
Cost of Production

Question 4

What is price elasticity of supply?

Answer 4

Percentage change in quantity supplied over market price, showing the relationship between the amount supplied and the market price of a product.

Question 5

What do the values of PES indicate?

Answer 5

When PES>1, supply is price elastic as more is supplied than price has risen

When PES < 1 it is inelastic as less is supplied more than price has risen

When PES = 0 supply is perfectly inelastic and so any increase in price supply will fall to 0

When PES = infinity is is perfectly elastic so any change in price will not change supply

Question 6

What affects the PES?

Answer 6

Time - takes long to produce so inelastic

Resource availability - if easy to supply, elastic

Inventory (spare inventory can be elastic)

Barriers to entry - low barriers to entry allows new entrants so more elastic

Ease of factor substitution - how fast to switch to producing something else - if fast, elastic

Spare capacity - if able to start up quickly then elastic

Question 7

What other 2 factors may influence PES?

Answer 7

• Perishability - inventory may be more costly if perishable so can be more elastic
• Complexity of the process - if less complex, more elastic