2.2 Supply

Question 1

Definition of ‘supply’

Answer 1

The supply is the amount of goods & services producers are willing and able to produce at any given price, over a time period, ceteris paribus

(why “willing and able”? - Because they have the available resource to produce)

Question 2

What is the ‘market supply’?

Answer 2

Sum of all individual supplies in the market

Question 3

What is the law of supply?

Answer 3

The law of supply states that as the price of a good increases, the quantity supplied will also increase, over a period of time, ceteris paribus (positive relationship)

Question 4

Why do we say firms are willing & able to produce more goods as the price increases?

Answer 4

Because in economy we assume all firms are profit-maximisers

Question 5

What will cause a movement along the supply curve?

Answer 5

A change in price will cause a movement along the supply curve

Question 6

If the price increases, what will happen to the supply curve?

Answer 6

The quantity supplied will increase, (expansion)

Question 7

If the price decreases, what will happen to the supply curve?

Answer 7

The quantity supplied will decrease

Question 8

What will cause a shift of the supply curve?

Answer 8

Shifts are due to non price determinants

Question 9

What are the non-price determinants of supply?

Answer 9

CISTERN

1. Cost of production
2. Indirect taxes
3. Subsidies
4. Technological change
5. Expectation of future prices
6. Number of firms

Question 10

How does “cost of production” shift the supply curve?

Answer 10

If costs increase, then profits decrease and thus supply decreases

Question 11

How does “indirect taxes” shift the supply curve?

Answer 11

higher production costs leads to a decrease in supply, so the supply curve shifts to the left

Question 12

How does “Subsidies” shift the supply curve?

Answer 12

Subsidies are a payment made by the gov to a firm. Subsidies decrease the production costs, therefore the supply increases and the supply curve shift to the right

Question 13

How does “Technological change” shift the supply curve?

Answer 13

Improvement in technology will increase productivity and therefore efficiency, causes a right shift of the supply curve

Question 14

How does “Expectation of future prices” shift the supply curve?

Answer 14

If firms expect the market price to increase in the future, they will decrease supply now and wait for the price to increase before supplying more, causes a left shift of the supply curve

Question 15

How does “Number of firms” shift the supply curve?

Answer 15

Higher number of firms –> outward shift of supply

Question 16

The law of diminishing marginal returns and the supply curve:

Answer 16

The law states that as the firm employs additional variable FOP’s, the marginal returns (AKA additional output) will at first increase, and then start to decrease as the variable FOP’s become less efficient.

As additional workers are employed, they got in the way of each other as there is not enough capital for all of them to use & the marginal returns decrease

& diminishing marginal returns of each additional worker leads to additional costs (marginal costs increase) & therefore, the only way for firms to continue to produce the good is if the price increase

Question 17

Increasing marginal costs and the supply curve:

Answer 17

The additional cost of producing one extra unit of a good (output)

Therefore firms will only willing and able to produce more output if they receive a higher price for their good
Therefore the principal of increasing marginal cost underpins the law of supply
+ and therefore the Demand curve is ALSO the Marginal Benefit curve.