3.3.3 - The Supply of Goods and Services

Question 1

What is market supply?

Answer 1

The quantity of a good or service that all the firms in a market plan to sell at given prices in a given period of time.

Question 2

What is the relationship between market supply and supply by a single firm?

Answer 2

Market supply is the sum of all the supply by single firms.

Question 3

What is a market supply curve?

Answer 3

Demonstrating the relationship between price and quantity for a market.

Question 4

Why does a market supply slope upwards?

Answer 4

Stems from the belief that all firms have a profit-maximising objective, therefore a firm will supply more of that product.

Question 5

What is profit?

Answer 5

The difference between total sales revenue and total costs of production.

Question 6

What is total revenue?

Answer 6

All the money received by a firm from selling its total output.

Question 7

If we assume a firm does not change their size or scale, what can we say about the cost of producing extra goods?

Answer 7

The cost of producing one extra good increases as firms produce more of the given good. As a result, it is unprofitable to produce and sell more of a good unless the price rises to compensate for the extra cost of production.

Question 8

What are the conditions of supply? (definition)

Answer 8

A determinant of supply, other than the good’s own price, that fixes the position of the supply curve.

Question 9

What are the actual conditions of supply?

Answer 9

Costs of production:
(Wage costs
Raw Material Costs
Energy Costs
Costs of borrowing)

Technical progress

Taxes imposed on firms (VAT or else)

Subsidies from the government to firms

Competition

Question 10

How do costs of production change the supply curve?

Answer 10

If the costs of production increase, the curve will shift to the left, as the firm supplies a smaller quantity at the given price.

Question 11

How does technical progress change the supply curve?

Answer 11

If technology progresses, the curve will shift rightward as the firm has lower production costs.

Question 12

How does taxes imposed change the supply curve?

Answer 12

If taxes are increased, it has a similar effect to increasing costs of production. The firm is less prepared to supply a similar level of the good, so the curve shifts to the left.

Inversely, if taxes are reduced, the supply curve shifts rightward.

Question 13

How do subsidies from the government change the supply curve?

Answer 13

If subsidies are increased, it is similar to reducing costs of production.

Question 14

What is an expenditure tax?

Answer 14

A tax that is applied on a firm to increase their costs.

Question 15

What does expenditure tax do to a firm?

Answer 15

Increase their costs, so the supply curve shifts upwards or leftwards.

Question 16

What does expenditure tax to a firm do to an individual?

Answer 16

As a result of increased costs on the firm, the firm passes on these costs onto the consumer through an increased price. These expenditure taxes are known as indirect taxes.

Despite the firm being taxed, the consumer inevitably pays for the tax.

Question 17

How does expenditure tax cause the supply curve to shift upwards?

Answer 17

For ad valorem tax, it takes a percentage of the sold good, so at low prices, the tax has a low effect, but at high prices, the tax takes a bigger effect. The cost as a percentage for the good causes the curve to shift upwards.

Question 18

Why do non-proportional taxes cause the supply curve to remain parallel but to the left

Answer 18

The cost of adding a tax that is at a set rate causes the supply to shift left but remain parallel as it takes a set amount, irrespective of the value of the good.

Question 19

What is composite supply?

Answer 19

Demand for a product can be supplied by the supply of two or more goods that are substitutes for one another (e.g. tea and coffee)

Question 20

What is competitive supply?

Answer 20

Two or more alternative goods can be produced using the same factors of production. (land for car factories could also be used for computer factories or even growing wheat.)