4.1.3.3 - Determinants of Supply

Why is there a positive correlation between price and quantity supplied? (Why is Supply sloped Upwards?)

- Profit motive = Assume that firms want to maximise profits so higher prices encourage more supply

- Survival = At a higher price level, less efficient producers can still cover their costs and make profits so survive --> more supply

- New Entrances = Higher prices increases incentive to enter new market

Factors (other than price) influencing change in Supply

CONGEST

Cost of production

Other related products (prices of them) - products in joint supply & competitive supply

Number of firms - more firms increases supply

Government policy - subsidies, indirect tax, regulations

Expectations about future prices

Shocks - External shocks

Technology - improvement in tech --> more efficient and cost effective production

Supply

The total amount of a product that producers are willing and able to supply at various price levels over a period of time.

Competitive Supply

Alternative products that a business could make with its factor resources of land, labour and capital

Joint Supply

Where production of one good automatically leads to supply of another using same raw materials (e.g. beef and leather hides)

Indirect Tax

A tax levied by the government on producers of a particular good or service (e.g. VAT)

Subsidy

Money provided by a government to a producer in order to encourage the production of certain goods or services

Productivity

Output per unit of input. The rate at which goods or services are produced

Regulation

Where government intervenes through legislation (such as pollution limits)

External Shock

An unpredictable event which are outside of the businesses control but can have a direct impact on the level of supply (or demand)

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