Supply Flashcards
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What is supply?
The quantity of a good or service that producers are willing
and able to supply at a given price in a given time period.
What is the relationship between price and supply?
As prices increase, supply increases. As prices fall,
supply fall
What causes a shift in supply?
SHIFTS DUE TO A NON-PRICE CHANGE:
•Production Costs-increase means they supply less at every price
• Increase in the number of producers or the
size of existing firms-supply shifts to the right
• New technology reduces cost of production and increases output
• Taxes and subsidies-eg VAT would lead to a rise in costs and a fall in quantity supplied at each price
- Climate important for agriculture-significant differences in how much they can supply each year
- Government regulation-governments may intervene through regulation eg. Health,minimum wages etc->increase in costs less willing to supply
When is PES inelastic?
When the percentage change in quantity supplied is less than the percentage change
in price, the supply will be PRICE INELASTIC. It will have a value between 0 and 1.
When is PES elastic?
When the percentage change in quantity supplied is greater than the percentage
change in price, then the supply will be PRICE ELASTIC. It will have a value between
1 and infinity
What is PES effect on
CONSUMERS
If PES is inelastic, then it
may prove more difficult for a consumer to get more of a product without paying a much higher price.
In some cases, such as seats in a Concert hall, an ability to pay more may not provide a seat, as the numbers are restricted to how many seats there are
. On the other hand if PES is elastic, it is
relatively easy to obtain more of the product, but there may be less flexibility in negotiating the price the
consumer wants
PES effect on
PRODUCERS
In most cases it is better for firms to have an elastic
PES as they can m ore easily respond to price changes.
Firms can increase their elasticity by:
• Adopting, or upgrading to, the latest technology
• Creating spare capacity
• Improving storage methods to prolong the life of a
product
• Keeping large amounts of stock
• Training employees so they can perform a range of
jobs as required
What is elasticity
Elasticity measures the extent (how much)
the quantity supplied will change when the
price of a product changes
A firm will only supply goods and services if it is
Firms consider their costs of
production and the price they think they will receive for each unit they sell. Therefore
as the selling price rises, producers will recognise that there is potentially more profit
to be made, so will supply more. However:
• Production costs are likely to rise as output rises, so a higher price is needed to cover those extra costs
• New firms may be attracted to the market because the higher prices mean they
can cover their higher production costs (increased competition)
What is PES?
Price elasticity of supply (PES) measures the responsiveness to which supply for a product changes when price is changed
Describe price elastic supply curve
An increase in price from P to P1 leads to a larger increase in quantity from Q to Q1.
this shows that quantity is responsive to a change in price. If resources are easily
available then it will be possible to respond quickly to price changes - ELASTIC
Describe price inelastic supply curve
An increase from P to P1 leads to a smaller
increase in quantity from Q to Q1. This shows
that quantity is relatively unresponsive to a change in price.
This could be because it is
difficult to store the product e.g. milk, so only a
limited extra quantity can be supplied if the
price rises- INELASTIC
Describe price perfectly inelastic supply curve
An increase from P to P1 leads to no change in quantity; it remains at Q. this shows that quantity is totally unresponsive to a change in price. These are products whose supply cannot, at least in the short run, be increased , or can be increased only by running down limited stocks e.g. tomatoes
Perfectly Price Elastic
Although there is no change in price, there is still an increase in quantity - this shows that quantity is infinite in its response t a change in price i.e. any quantity will be supplied at that, but Only that, price
Unitary Price Elastic
An increase in price leads to the same percentage
increase in supply from Q to Q1.
This shows
that any percentage change in price
will bring about the same
percentage change in quantity. Value of l
