Econ flashcards supply

Define supply.

Quantity producers are willing and able to sell at a given price in a given time period.

Law of supply?

Price ↑ → quantity supplied ↑, ceteris paribus.

Main determinants of supply?

Production costs, technology, indirect taxes/subsidies, number of firms, weather and expectations.

Production costs rise — effect on supply?

Profitability at each price ↓ → firms supply less → supply shifts left.

Technology improves — effect on supply?

Productivity ↑ / unit costs ↓ → firms can profitably supply more → supply shifts right.

PES formula?

% change in QS ÷ % change in price

Main determinants of PES?

Spare capacity, ability to store stock, time period and mobility of factors of production.

Why does spare capacity make supply more elastic?

Firms can increase output quickly without major new investment → QS responds strongly to price.

Define equilibrium price.

Price where QD = QS, so there is no tendency for price to change.

Three functions of the price mechanism?

Rationing, signalling and incentivising.

Rationing function?

Higher prices allocate scarce goods towards consumers willing and able to pay.

Signalling function?

Price changes communicate information about scarcity and consumer demand to producers.

Incentive function?

Higher prices/profits incentivise firms to increase supply.

Demand rises — equilibrium chain?

D shifts right → excess demand at old price → price ↑ → firms incentivised to supply more + consumers rationed → new equilibrium with higher P and Q.

Why does PES affect the result of increased demand?

Inelastic S → firms cannot expand output much → demand increase causes larger P rise + smaller Q rise.