1.2 Supply

Supply definition

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

law of supply

as the price of the product rises, the quantity supplied of that product will usually increase, ceteris paribus.

Producers produce more when..

higher prices = higher potential profits = increase in quantity supplied.

more products may enter market = increase in quantity supplied

individual supply

individual producers supply at a given price in a given period of time

market supply

sum of individual supply

Non-price determinants of supply

1. changed in costs of FOPs

2. changes in technology

3. changes in prices of related goods

4. expectations of the producers

5. indirect taxes and subsidies

6. number of firms in the market

changed in costs of FOPs

Any FOPs rises the cost of production with decrease supply.

Causing supply to shift left

Changes in technology

advancements increase production = higher supply.

backward step = supply decreases

changes in prices of related goods

Joint supply - produced together often by-products. An increaseoM in one causes an increase in other.

Competitive supply - alternative uses of the same FOPs. An increase in one causes a decrease in the other

Expectations of the producers

optimistic about the future - increase supply

pessimistic about the future - decrease supply.

Expectations affect production decisions

Indirect taxes

taxes on production that are meant to decrease supply.

they raise the costs of production per each unit

less profit per unit, they are less willing or able to produce and supply the same quantity as before

reasons behind indirect taxes

1. discourage production and consumption especially of demerit goods (cigarets)

2. internalise negative externalities (reduce third parties harm)

3. raise government revenue

Subsidies what is is ?

financial payment or benefit given by the government to producers to lower their production costs and encourage more output

Subsidies affect on the supply curve

1. reduces the cost of production

2. increased output

3. supply curve shifts right

reasons behind subsidies

1. encourage production of merit goods (healthcare, education)

2. promote employment and support key industries

3. help redo prices for consumers

number of firms in the market

1. profitable market = encourages more firms will enter market = supply to increase

2. profit falling market =encourages firms to exit = supply decreases

Movement along supply curve

caused by a change in price

Shift of the supply curve

caused by non-price determinants