2.2 Supply

What is Supply?

the total amount of a product or service that producers are willing and able to sell at various prices in a given time period.

Why does the supply curve slope upward?

The supply curve slopes upward because there is a positive (direct) relationship between price and quantity supplied (QS). Rational, profit-maximizing producers are willing to supply more as prices increase to maximize their profits.

What is the Law of Supply?

An increase in price leads to an increase in quantity supplied, assuming all other factors remain constant 

What is Quantity Supplied?

The specific amount of a good or service that producers are willing to sell at a particular price during a given time period.

What is Market Supply and how is it calculated?

Market supply is the combination of all the individual supply for a good/service. It is calculated by adding up the individual supply at each price level.

What are the key assumptions underlying the Law of Supply?

The two key assumptions underlying the Law of Supply are:

1. The Law of Diminishing Marginal Returns

2. Increasing Marginal Costs

These assumptions focus on cost-related factors that influence producers' supply decisions and explain the upward slope of the supply curve.

Explain the Law of Diminishing Marginal Returns.

As more of a variable factor of production (e.g., labor) is added to fixed factors (e.g., capital), there will initially be an increase in productivity. However, a point will be reached where adding additional units of the variable factor begins to decrease productivity.

Explain the concept of Increasing Marginal Costs.

Increasing marginal costs refer to the concept that as a producer increases the quantity of a good/service supplied, the additional cost of producing each additional unit also increases. This means producers are willing to supply a greater quantity at higher prices to justify these higher production costs.

What causes a movement along a supply curve?

A movement along a supply curve occurs when price is the only factor that changes (ceteris paribus), leading to a change in the quantity supplied (QS).

What is an 'extension in quantity supplied (QS)'?

An 'extension in quantity supplied (QS)' is a movement up the supply curve caused by an increase in price, leading to an increase in the quantity supplied.

What is a 'contraction in quantity supplied (QS)'?

A 'contraction in quantity supplied (QS)' is a movement down the supply curve caused by a decrease in price, leading to a decrease in the quantity supplied.

What are the Non-Price Determinants of Supply?

Factors that change the supply of a good/service, irrespective of the price level, causing the entire supply curve to shift.

How do changes in non-price determinants of supply affect the supply curve?

Changes to any of the non-price determinants of supply shift the entire supply curve (left for a decrease in supply, right for an increase in supply) as opposed to a movement along the curve.

How do changes in the costs of production (COP) affect supply?

1. If COP Increases: Supply decreases, shifting the supply curve left (S \rightarrow S_1).

2. If COP Decreases: Supply increases, shifting the supply curve right (S \rightarrow S_2).

How do changes in indirect taxes affect supply?

1. If Taxes Increase: Supply decreases (S \rightarrow S_1) due to higher production costs.

2. If Taxes Decrease: Supply increases (S \rightarrow S_2) due to lower production costs.

How do changes in subsidies affect supply?

1. If Subsidy Increases: Supply increases (S \rightarrow S_2) due to lower effective production costs.

2. If Subsidy Decreases: Supply decreases (S \rightarrow S_1) due to higher effective production costs.

How does new technology affect supply?

1. If Technology Increases: Supply increases (S \rightarrow S_2) by boosting productivity and lowering costs.

2. If Technology Decreases / Ages: Supply decreases (S \rightarrow S_1) due to reduced efficiency.

How does a change in the number of firms in an industry affect market supply?

1. If No. of Firms Increases: Market supply increases, shifting the supply curve right (S \rightarrow S_2).

2. If No. of Firms Decreases: Market supply decreases, shifting the supply curve left (S \rightarrow S_1).

How do weather events affect supply, especially in agricultural markets?

1. Droughts/Flooding: Supply decreases (S \rightarrow S_1) due to negative impacts on production.

2. Good Weather Conditions: Supply increases (S \rightarrow S_2) due to favorable growing conditions.

How do future price expectations of firms affect current supply?

1. If Expectations Price will Rise: Firms increase current supply, shifting the supply curve right (S \rightarrow S_2).

2. If Expectations Price will Fall: Firms decrease current supply, shifting the supply curve left (S \rightarrow S_1).

Explain how 'goods in joint supply' affect supply.

When an increase in the supply of one good (e.g., beef) in joint supply leads to an increase in the supply of the other good (e.g., leather) because they are produced together.

• Supply of one good increases: S \rightarrow S_2 (right shift).

• Supply of the other good also increases: S \rightarrow S_2 (right shift).

Explain how 'goods in competitive supply' affect supply.

When an increase in the supply of one good (e.g., potatoes by a farmer) leads to a decrease in the supply of another good (e.g., wheat) because resources are reallocated from one to the other.

• Supply of good A increases: S \rightarrow S_2 (right shift).

• Supply of good B falls: S \rightarrow S_1 (left shift).

What is a common error regarding subsidies and the demand curve?

A common error is to explain that a subsidy shifts the demand curve for a product to the right. This is incorrect. A subsidy shifts the supply curve to the right.