1.3.3-6 supply and markets

aqa a level microeconomics

supply

the quantity of a good or service that producers are willing and able to sell at a given price

the law of supply

as the price of a good or service rises, quantity supplied increases

causes of shifts in supply

changing prices of factors of production, technological advancements, government policy

joint supply

a single production process produces two or more outputs (e.g. cows produce milk and beef)

individual supply

a producer’s supply of a good or service

market supply

all producers’ supplies to the market summed together

market equilibrium

the point at which demand equals supply, the market clearing price is p1

disequilibrium

occurs when there’s an imbalance in QD and QS

excess supply

occurs when price is set higher than equilibrium, surplus

consumer surplus

difference between total quantity consumers are willing and able to pay for and the total they pay (market price)

producer surplus

difference between what producers are willing and able to supply and the price they actually receive (market price)

price elasticity of supply, PES

the responsiveness of quantity supplies of a good or service to a change in its price

perfectly elastic supply

PES = +infinity

perfectly inelastic supply

PES = 0

factors influencing PES

spare capacity, time period, availability of producer substitutes, ease of entry into the market

PES in short run

inelastic in the short run, firms find it difficult to switch production from one good to another, firms’s capacity and at least one factor of production is fixed, often firms can recruit more workers and buy more material but difficult to build extra production facilities

PES in long run

in the long run all factors of production are variable so firms can increase capacity, PES is elastic in the long run