2.2 Supply theory

supply

quantities of goods/services that producers are willing and able to supply at different prices in a given time period, ceteris paribus.

what is the law of supply

increase in price leads to an increase in the quantity supplied of a good/service

positive relationship between quantity supplied and price

what is the difference between individual supply and market supply?

individual - single producer

market - sum of each individual producers' supply at a given time

what 2 assumptions underlie the law of supply

1. increasing marginal costs

2. the law of diminishing returns

increasing marginal costs

cost of producing an additional unit of a good or service rises as total production increases

producers are willing to supply a greater quantity only at higher prices to justify the higher costs of production

the law of diminishing marginal returns

when additional variable factors of production are employed to fixed factors - marginal returns will eventually decrease when adding additional units of the factor begins to decrease productivity

non-price determinants of supply

1. changes in the costs of FoPs

2. prices of related goods (joint and competitive supply)

3. indirect taxes and subsidies

4. future price expectations

5. changes in technology

6. number of firms

subsidies/taxes

if a subsidy is imposed on a good or a service, supply will shift right

if a tax is imposed on a good or a service, supply will shift left

changes in technology

improved technology → more efficiency and productivity → firms willing to supply more at any given price → leftwards shift

joint supply

when the production of one good automatically produces another good (by-product) from the same raw material or process

e.g. beef and leather, wheat and straw, mutton and wool

competitive supply

different products a firm can produce with its factors of production

changes in the costs of factors of production

a decrease in the costs of FoPs would lead to an increase in supply and vice versa

future price expectations

if producers expect prices to decrease, they may increase supply in the present to maximise revenue before prices drop

number of firms in the market

more firms → more supply

what causes a movement along the supply curve

change in the price of a good or a service itself relative to the quantity supplied

what causes a shift in the entire supply curve

a change in any of the non-price determinants altering the quantity supplied at every point