8- Supply

Question 1

Supply definition

Answer 1

The quantity of a good or a service producers are willing and able to produce at a given price in a given time period.

Question 2

Law of Supply

Answer 2

There is a direct relationship between price and quantity supplied. As price increases so does quantity demanded - assuming ceteris paribus.

Question 3

What explains the law of supply?

Answer 3

• Profit Motive- there is a strong incentive to produce more when prices are higher as more profit can be made.
• Production and Costs- when output expands, a firm’s production costs tend to rise, therefore a higher price is needed to cover these extra costs of production. This may be due to the effects of diminishing returns as more factor inputs are added to production.
• New entrants to the market- higher prices may create an incentive for other businesses to enter a market leading to an increase in total supply.

Question 4

Supply curve

Answer 4

It is almost always upwards sloping due to the direct relationship between price and quantity supplied.

Question 5

Contraction of supply

Answer 5

A movement down the supply curve as price increases so does quantity supplied

Question 6

Extension of Supply

Answer 6

A movement down the supply curve as prices decreases so do quantity supplied

Question 7

Conditions of Supply

Answer 7

Non price factors that cause a change in supply:

• Productivity
• Indirect tax like VAT
• Number of firms/ new entrants into the market
• Technology
• Subsidy
• Weather
• Costs of production

Question 8

What does a change in a condition of supply do to the supply curve?

Answer 8

If supply increases, the supply curve will shift to the right. And vice versa if supply decreases.

Question 9

What is a Subsidy?

Answer 9

A financial grant by the government to increase supply.

Question 10

Producer Surplus definition

Answer 10

The difference between the price consumers are willing and able to produce for compared to the price they actually receive.

Question 11

Where is Producer Surplus found?

Answer 11

Below the price line but above the supply curve.

Question 12

What is Diminishing Marginal Returns?

Answer 12

At a certain point, employing an additional factor of production causes a relatively smaller increase in output.

Diminishing returns occur in the short run when one factor is fixed (e.g. capital)
If the variable factor of production is increased (e.g. labour), there comes a point where it will become less productive and therefore there will eventually be a decreasing marginal and then average product.
This is because, if capital is fixed, extra workers will eventually get in each other’s way as they attempt to increase production. E.g. think about the effectiveness of extra workers in a small café. If more workers are employed, production could increase but more and more slowly.
This law only applies in the short run because, in the long run, all factors are variable.

Question 13

Short Run Definition

Answer 13

Is the length of time where at least one factor of production is fixed.

Question 14

Long Run Definition

Answer 14

Is the length of time over which all factors of production can be changed.

Question 15

In the labour market, where is the supply for labour from?

Answer 15

Households

Question 16

In a market for goods and services where is supply from?

Answer 16

Firms