Supply Flashcards
ch. 5 (15 cards)
Define supply
The quantity of a good or service that producers are willing and able to supply at different prices in a given time period
Law of supply
As the price of a product rises the quantity supplied will (usually) increase as well, ceteris paribus
Assumptions underlying the law of supply
- The law of diminishing marginal returns
- Increasing marginal costs
What is the law of diminishing marginal returns?
As extra units (ex. labor, capital) are added to a given quantity of a fixed factor (ex. land) the output from each additional unit of the variable factor (the marginal product) will eventually diminish
What does increasing marginal costs refer to?
As the output from each additional unit of the variable factor (the marginal product) diminish and the cost per factor stays the same, the cost of producing each extra unit (marginal cost) increase
Relationship between an individual producer’s supply the market’s supply
Producer A supplying 3 beers at 7$ and producer B supplying 8 beers at 7$ leads to the markets supplying 11 beers at 7$
“Change in Qs” refers to…
movement along an existing supply curve due to changes in the price
“Change in supply” refers to…
a shift in the supply curve
What can cause a shift of the supply curve?
Non-price determinants of supply:
1. Changes in costs of FoPs
2. Price of related goods
3. Indirect taxes and subsities
4. Future price expectations
5. Changes in technology
6. Number of firms
Changes in costs of FoPs as a non-price determinant of supply
Increase in cost of FoP leads to increase in firms production costs and supply will shift to left
Price of related goods as a non-price determinant of supply
- Competitive supply
- increase in demand of substitute good will increase price and hence supply of that good, resulting in a shift to the left of the supply on the market of the other product (ex. snowboards become popular and supply of skis shift left)
- Joint supply
- when one good is produced following another good - by-products - if demand for one good in joint supply increases the supply of the other will increase as well (ex. higher demand for petrol causing higher price and supply of petrol but also an increase in the supply of diesel despite there being no price change on that market)
Indirect taxes and subsidies as non-price determinants of supply
- Indirect taxes
- aka expenditure taxes (like VAT), are added to the price of a product and act as an increase in the cost of production for producers since it causes higher prices (hence lower demand) for consumers and a lower price than before the tax for the producer, meaning a decrease in production - the supply curve shifts up by the amount of the tax
- Subsidies
- payments by the gov to firms which reduce their cost of production and hence causes a shift downwards of the curve by the amount of the subsidy
Future price expectations as non-price determinants of supply
producers expecting higher future prices might withhold product from the market to be able to meet future demand (a higher price meaning a higher supply) hence the supply curve shifts left BUT they could also decide to increase supply in order to meet future demand at the expected higher prices - causing a right-shift.
An expected fall in demand and hence prices in the future may cause producers to decrease their supply in the present - shift to left
Changes in technology as a non-price determinant of supply
Improved tech leads to increased supply at same price and hence a shift to the right
Number of firms as a non-price determinant of supply
Increase in number of firms means an overall increase in quantity of product supplied - shift to right and vice versa with decrease in number of firms
