AOS 2 part 2- supply and equilibirum Flashcards
(16 cards)
supply
indicates a willingness and an ability to supply at that
price.
law of supply
The quantity of a good or service that sellers are
prepared to supply varies directly (in the same direction) with the change in price, assuming other factors do not change.
As price ↑…..
As price ↓….
there is an expansion in the quantity supplied, causing a movement upwards along the supply line/curve.
there is a contraction in the quantity supplied, causing
a movement downwards along the supply line/curve.
what causes the supply curve to shift? (factors)
Changes in the costs of production
Technology
Productivity
Climatic conditions
Other disruptions
changes in price of production
costs of land, labour and capital can change over time
So if costs of production go down, and nothing else changes (including price) business can make more profit
If you sell buns and the cost of sugar/flour/labour goes down, you can make more profit than before – even if you still sell the buns at the same price as before
If so, you would be willing to supply more buns at every price level
So the whole curve shifts to the right, to the right
But if costs of production go up and nothing else changes, businesses will make less profit per bun – so they will be less willing to supply buns at every price level – so the whole S curve shifts to the left to the left
technology
The use of new technology by suppliers means that the same product can be made more quickly (less time) or more efficiently (needs less resources such as land, labour or capital)
the use of technology would decrease the cost of
supplying goods and services
So at each level of price, there would be more suppliers willing to supply product – or existing suppliers can supply more product
productivity growth
Productivity measures output per unit of input – so how much stuff is being produced by each unit of land,
labour, capital
If resources can be used more productively, this means the same output can be produced with fewer resources
This means that supplier’s costs of production can be decreased as they need fewer resources to make the same amount of stuff
This makes them willing to supply more product at each existing level of price – their costs went down, they can
make more profit
So if there is productivity growth, the whole supply curve will shift right – more product supplied at every price level - when productivity improves/increases
climatic conditions
a lot of products are linked to climate and supply can be affected when the climatic conditions change
supply of things like clothing (made from cotton, wool) and food (dairy, meat, fruit and vegetables) will be especially sensitive to climatic conditions
An unfavourable change in climatic conditions, such as a rise in floods, droughts, bushfires, will cause the entire S curve to shift left,
A favourable change in climatic conditions, such as fewer floods, droughts or bushfires, will cause the entire S curve toshift right,
other disruptions
pandemic,
Government intervention eg gov could impose more taxes on certain products they want to discorgae causing the supply curve tp shift left
wars
what is the distinction between a movement along the supply curve and a shift of the supply curve
movement along is caused by a change in price and a shift of is caused by a change in anything other than price
equilibrium
is the price where the quantity demanded by consumers is exactly equal to the quantity supplied
by businesses
disequilibrium
when the market is out of equilibrium
Disequilibrium - shortages
If the market price is below equilibrium, there will be a shortage of stock –not every buyer will get the product because there is not enough to go around as not enough suppliers are willing to make the product at that price
Disequilibrium - surplus
If the market price is above equilibrium, there will be a surplus of products – sellers will have leftover stock they cannot sell as the price is too high
How the market corrects a shortage – prices below the equilibrium
Businesses realise they are running out of stock every day so they raise their price a bit
Some buyers drop out as they don’t want to pay the higher prices
Some new sellers enter the market to take advantage of the higher prices
This continues – the price keeps getting higher, D keeps falling and S keeps rising until equilibrium is restored
How the market corrects a surplus –
prices above the equilibrium
Businesses realise they have too much leftover stock every day so they drop their price a bit
Some buyers will return as notice prices dropped a bit so now they are happy to buy
Some more sellers leave the as they don’t want to sell at the lower prices
This continues – the price keeps getting lower, D keeps rising and S keeps falling until equilibrium is restored
