3.3 The supply of goods and services

Define market supply

The quantity of a good or service that all the firms in a market plan to sell at given prices in a given period of time.

Explaining a market supply curve

(page 57) The diagram shows a market supply curve which indicates that as a goods price rises, more is supplied. If the price starts off low, for example at P1, firms are willing to supply Q1. But if the price rises to P2, planned supply increases to Q2.

The main reason for upward sloping supply curve stems from the profit maximising objective which economists assume firms have. If we assume that a firm always aims to make the biggest possible profit, it follows that a firm will only want to supply more of a good if it is profitable to do so.

Assuming firms do not change their size or scale, the cost of producing extra units of a good generally increases as firms produce more of the good. As a result, it is unprofitable to produce and sell extra units of a good unless the price rises to compensate for the extra cost of production. Rising prices will also encourage new firms to enter the market. The result is the upward sloping market curve.

Define profit

The difference between total sales revenue and total costs of production

Define total revenue

All the money received by a firm from selling its total output

What is conditions of supply

The determinants of supply, other than the goods own price, the fix the position of the supply curve

What are the main conditions of supply?

- Costs of production

- Technical progress

- Taxes imposed on firms

- Subsidies granted by the government

What is an increase in supply?

A rightward shift of the supply curve

What is a decrease in supply?

A leftward shift of the supply curve