1.2.2 Supply

Question 1

Define ‘supply’

Answer 1

• The number of goods/services businesses are willing to sell at a given price in a specific time period

Question 2

What is the relationship between supply and price?

Answer 2

There is a direct relationship between supply & price
As the price increases the quanitity supplied increases
As the price decreases the quantity supplied decreases

At higher prices businesses are incentivised to supply more of product

Question 3

How will a business use the relationship of supply and price?

Answer 3

• As a price paid by customers increases on a product or service normally a business will want to supply more in anticipation of higher profits

Question 4

What deterimines the levels of supply?

Answer 4

• Price

Question 5

What are the factors that lead to a change in supply?

Answer 5

• Changes in the costs of production
• Introduction of new technology
• Indirect taxes
• Government subsidies
• External shocks

Question 6

How can changes in the cost of production affect supply?

Answer 6

• If a firm’s cost of production increases due to the increase in the price of a key resource
• Then there will be a decrease in supply as firm can now only afford to produce fewer products

Pdct will have lower sales due lack of supply & therefore lower revenue

Question 7

How can the introduction of new technology affect supply?

Answer 7

• Bringing in new technology can increase supply by making the production process more efficient

However outdated technology can decrease supply

Question 8

How can indirect taxes affect supply?

Answer 8

• Indirect taxes cause producers to spend more on production.
• This means that they will sell products for a higher price and decrease supply

VAT/Customs tax/Excise tax are all indirect taxes

Question 9

How can government subsides affect supply?

Answer 9

• This is a payment from the government to encourage suppliers to increase production of a good or service- leading to a fall in price

With a subsidy there is an increase in supply because costs have been lowered

Question 10

How can external shocks affect supply?

Answer 10

• A positive supply shock increases output, causing prices to decrease
• While a negative supply shock decreases output, causing prices to increase

May mean that business may not want to supply goods e.g. to a country that is at war.