3.3 The Determinants Of The Supply Of Goods And Services

Question 1

What is supply?

Answer 1

-Supply is the quantity of a good or service that a producer is able and willing to
supply at a given price during a given period of time

Question 2

Why is the supply curve upward sloping?

Answer 2

o If price increases, it is more profitable for firms to supply the good, so supply
increases.

o High prices encourage new firms to enter the market, because it seems
profitable, so supply increases.

o With larger outputs, firm’s costs increase, so they need to charge a higher price to cover the costs.

Question 3

Movements along the supply curve

Answer 3

-Only changes in price will cause these movements along the supply curve.
-This is based on the theory of the profit motive.
-Firms are driven by the desire to make large profits.
-extension of supply curve
-contraction of supply curve

Question 4

Factors that shift the supply curve

Answer 4

-Price changes do not shift the supply curve.

-The factors that shift the supply curve can be remembered using the mnemonic
PINTSWC:

o P- Productivity
o I- Indirect taxes
o N- Number of firms
o T- Technology
o S- Subsidies
o W- Weather
o C- Costs of production

Question 5

Factors shifting the supply curve-Productivity

Answer 5

-Higher productivity causes an outward shift in supply, because average costs for the firm fall.

Question 6

Factors shifting the supply curve-Indirect taxes

Answer 6

-Cause an inward shift in supply.

Question 7

Factors shifting the supply curve-Numbers of firms

Answer 7

-The more firms there are, the larger the supply.

Question 8

Factors shifting the supply curve-Technology

Answer 8

-More advanced the technology causes an outward shift in supply

Question 9

Factors shifting the supply curve-Subsidies

Answer 9

-Subsidies cause an outward shift in supply.

Question 10

Factors shifting the supply curve-Weather

Answer 10

-This is particularly for agricultural produce
-Favourable conditions will increase supply.

Question 11

Factors shifting supply-Costs of production

Answer 11

-If costs of production fall, the firm can afford to supply more.

-If costs rise, such as with higher wages, there will be an inward shift in supply.

-Also, depreciation in the exchange rate will increase the cost of imports, which will cause an inward shift in supply.