Chapter 5: Supply

What is supply?

the quantity of a good or service producers are willing and able to supply at different prices in a given time period

Law of supply

As price of a product rises, quantity supplies also increases

What are the non-price determinants of supply?

costs of FOP

price of related goods (competitive supply, joint supply)

Gov intervention (taxes and subsidies)

expectation of future price

changes in technology

weather or natural disasters

How to explain law of supply

Short run - The short run is defined as the period of time in which at least one factor of production is fixed. Because we are explaining the Law of Supply, and thus production, we shall focus on the short run, where all production takes place. When a firm is producing, some of its factors of production will be fixed in the short run, ie the firm will not be able to increase the quantity of certain factors quickly, even if the price goes up and the producer wishes to produce more. Often the fixed factor is some element of capital or land, but this is not always the case. It could be a type of highly skilled labour, such as a specialist machine worker. Therefore, if a firm wishes to increase output in the short run, it may only do so by applying more units of its variable factors to the fixed factors that it possesses, while it plans ahead to change the number of fixed factors that it has.

Law of diminishing returns - In the short run, if a firm increases output by adding more and more units of a variable factor to its fixed factors, it is logical to assume that the output from each unit added will eventually fall. To understand this fully, we need to consider the concepts of total, average and marginal product.

Law of supply chain of reasoning

See page 88 for AC, TC, MP and MC