Econs: Theory Of Supply

Define Supply

Supply is defined as the amount of good or service that producers are both willing and able to sell at each possible price in a given period of time

Define Quantity Supplied

Refers to a particular quantity offered for sale at a particular price as reflected by a point on a given supply curve.

Define Supply

Refers to quantity supplied at every price; relationship between price and quantity supplied is represented by the entire supply curve.

What Is The Law Of Supply?

Law of Supply states that at any given time period, the quantity supplied of a product is directly related to its price, ceteris paribus.

What Are The Reasons Behind The Law Of Supply?

• Producers Motivated By Profit

• Higher Prices Increasing The Ability To Supply A Good/Service

How Is Profit Calculated?

Profit = Total Revenue - Total Cost

How Does Profit Motivate Producers’ Ability To Produce?

Profits are the reward to the entrepreneur for risk-taking and innovation;

• increase in price of a good would make producer more willing to increase the quantity supplied since it would be more profitable, covering higher opportunity costs with the higher price.

How Do Higher Prices Increase Ability To Supply A Good or Service?

• Costs are incurred from raw materials and labour costs needed to produce the good/service.

• When output increases, each additional unit of good or service becomes increasingly costly to produce as factors of production become increasingly scarce.

• Producers will only produce an additional unit of good only when marginal revenue is able to cover the marginal cost of production.

What Is Individual Supply?

It is the supply of one producer

How Can Individual Supply Be Represented Visually?

Using a supply schedule; where relationship between price and quantity supplied is represented in a table

What Is A Market Supply?

It is the sum of all individual supply schedules of all the producers in the market

How Can Market Supply Be Calculated?

Derived by summing up the quantity supplied of each producer in the market at every price level

Define A Change In Supply + How It Is Represented On The Supply Curve

Changes in non-price determinants; represented by a shift of the supply curve

What Are The Non-Price Determinants That Causes Change In Supply? [WETPIGS]

• Weather Conditions

• Expectations of Producers

• Technology

• Price Of Related Goods (joint/competitive supply)

• Input Prices

• Government Policies

• Number Of Suppliers

How Do Weather Conditions Act As A Non-Price Determinant?

Output of agricultural products is severely affected by variation in weather conditions

• Favourable weather conditions — productive harvest and increased supply of vegetables

• Seasonal Agricultural Products — like durians, which can only be harvested during a particular season

How Do Expectations Of Producers Act As A Non-Price Determinant?

• Producers expect price to increase — reduce supply now and raise their level of stocks at hand only to release them when prices increase

• Expect price to decrease — raise supply now to draw down their stocks to sell and avoid holding on to stocks when price does fall.

How Does State Of Technology Act As A Non-Price Determinant?

Improvement in tech — more efficient production of goods.

• Producer can use fewer factors of production

• Require less time for the production of a given output, lowering unit cost of production, increasing profits.

• Causes supply to increase

What Two Types Of Price Of Related Goods?

• Competitive Supply

• Joint Supply

What Is Competitive Supply?

They are the goods that use similar resources for production

• e.g. both carrot and potatoes need same resource (land), to be produced

  • Should one have an increase in demand, more of it would be produced at the expense of the other

What is the relationship between two goods in competitive supply?

Supply of a good is inversely related to the price of goods with which is it in competitive supply

What Is Joint Demand?

They are the goods that are also produced when another is produced.

• When a cow is slaughtered, beef and leather can be extracted from its carcass

What is the relationship between two goods in joint supply?

When there is an increased production of one good, there will also be an increase in the supply of another good in joint demand

How Does Price & Availability Of Factor Inputs/Factors Of Production Act As Non-Price Determinants?

Price at which producers are willing and able to sell are dependent on the cost of production.

• Costs of production are determined by the price and availability of factor inputs

  • E.g. bad weather affected yield of rice, leading lower supply of rice and increased prices for rise, which in turn causes sushi prices to rise

How Do Government Policies Act As A Non-Price Determinant?

Affects supply through the imposition of taxes or granting of subsidies

• Goods and Services Tax (GST); increases cost of production, causes profits to drop, which causes supply to drop as it demotivates producers from continuing production.

• Subsidies; lower costs of production, increasing profits and incentive for producing to produce more.

Define A Change In Quantity Supplied + How It Is Represented On The Supply Curve

Caused changes in price; represented by a movement along the supply curve

How Can Changes In Price Affect Changes In Quantity Supplied?

• Increase in price increases quantity supplied

  • Increase In quantity supplied is represented by a movement up the supply curve