OCR Economics GCSE: Supply

Supply

The ability and willingness of firms to provide goods and services at each price at a given time period.

Supply Curve

A graphical representation illustrating the positive relationship between the price of a good or service and the quantity that producers are willing and able to supply at that price, holding all other factors constant

Individual supply

The quantity of a good or service that a single firm is willing to supply at each price at a given time period.

Market supply

Total quantity of a good or service that all firms are willing to supply at each price at a given time period.

Movements Along the Supply Curve

Caused by price changes from a shift in the demand curve.

Price increase effect

Expansion, quantity supplied increases.

Price decrease effect

Contraction, quantity supplied decreases.

Causes of Shifts of the Supply Curve

Costs of production, taxes/subsidies, technology, climate, number of producers, size of producers, government regulation.

Price Elasticity of Supply (PES)

The responsiveness of quantity supplied to a change in the price of the product.

PES formula

% change in Qs ÷ % change in price.

Elastic supply curve

Shallow - when resources are easily available

Inelastic supply curve

Steep - potentially only a limited extra quantity can be supplied if price rises

Perfectly inelastic

Vertical - supply cannot be increased at least in the short-run

Perfectly elastic

Horizontal - any quantity is supplied at only that price

Importance of PES for consumers

1. Inelastic supply in short run (e.g., housing, agricultural goods) -> quantity cannot respond to demand changes -> price spikes/shortages/queuing

2. High PES (elastic supply) for manufactured goods -> easy for firms to increase production in response to demand rises -> stable prices/consistent availability

3. PES affects how tax burden is shared -> if supply is inelastic, producers bear more of the tax -> less price increase passed to consumers

PES may be less important for consumers

1. Long-run supply becomes more elastic (firms build capacity) -> quantity eventually increases/prices stabilise -> shortages are temporary

2. Stable prices may mean less scope for consumer negotiation/bargaining -> firms maintain fixed pricing strategies -> reduced potential for 'deals' or discounts

3. The incidence of tax is complex in reality -> firms may use other tactics (e.g., cutting quality, price discrimination) -> consumer still indirectly affected by non-price factors

Importance of PES for producers

1. High PES (elastic supply) -> ability to quickly meet rising demand -> increased total revenue/profitability

2. Inelastic PES in short term -> unable to capitalize on temporary price spikes -> lost revenue opportunities

3. Understanding PES helps operational planning -> efficient resource allocation (labour, capital) -> optimized production costs

PES may be less important for producers

1. High PES requires spare capacity/stockholding -> increased storage/holding costs -> potential reduction in net profit margins

2. Focus on long-term strategy/capacity building -> achieves greater market dominance later -> higher sustained profitability in the future

3. PES is hard to measure accurately -> decisions based on flawed metrics -> stock wastage/inefficient capital expenditure