Download The Theory of Market Supply

The Theory of Market Supply
Supply is the quantity of a product that a producer is willing and able to supply / sell onto a market at a
given price in a given time period
The law of supply - a greater quantity of a good or service will be supplied at a higher price. In part this is
due to the profit incentive. For example, if you are a business extracting crude oil, you stand to make a
higher profit for every barrel supplied if the market price is $100 compared to a price of $60.
A change in market price of the product itself will cause a movement along the market supply curve
But changes in other conditions of supply (i.e. non-price factors) will bring about a shift in the supply curve.
Most of these supply conditions relate to the costs of production facing a business. But supply can also be
affected by changes in the prices of other goods and services, price expectations, shifts in technology,
supply-shocks that disrupt normal supply and also the impact of government regulations on producers.
In the exercise below identify whether the change in the market will bring about either a movement along the
supply curve or a shift in the supply curve at each price. And then decide whether you expect to see a
contraction/expansion of supply (for a movement along) or a fall/increase in supply (for a shift).
Exercise on the determinants of supply
Supply for?
Change in the market
Supply of frozen
pizzas
An increase in the price of
frozen pizzas due to an
increase in demand
Wheat supply
(UK)
Drought conditions in East
Anglia are expected to continue
through to harvest time
Christmas cards
A fall in the international price of
pulp
Market supply for
transatlantic flights
A rise in the price of aviation
fuel
Market supply for
transatlantic flights
Two airlines from Asian
countries enter the market for
flights from London to New York
Market supply of
clothing in retail
stores
Many cotton crops across Asia
are destroyed by floods
Supply of new
flats to rent in the
city of Oxford
The local council relaxes
planning laws for property
developers
The market supply
of corn in the USA
The US government offers a
subsidy of $2 per tonne for
wheat farmers who convert
their wheat into bio-fuels
Movement
along curve
OR a shift in
the supply
curve?
(i) For a
movement expansion or
contraction?
(ii) For a shift
in supply increase or
decrease?
Supply for?
Change in the market
World supply of
petroleum
New transitional government in
Libya announces the reopening
of Libyan refineries
Supply of workers
to the fruit-picking
industry
The government increases the
minimum wage that must be
paid to people working in the
farming industry
Market supply of
milk in the UK
A long term rise in the market
price of lamb
Supply of real ale
The government reduces the
tax applied to each bottle of real
ale produced in the UK
Supply of
mountain bikes
A government subsidy of £20 is
offered to mountain-bike
manufacturers to encourage
cycle use in towns and cities
Supply of white
bread
A rise in the world price of flour
Market supply of
bottled water
Improvements in production
technology reduce the amount
of plastic needed for each bottle
Supply of package
holidays to Spain
and Italy in 2012
Expectations of a recession in
the UK economy in 2012
Supply of organic
chocolate
A fall in the productivity of
farmers supplying organic
chocolate
Market supply of
potato chips
Expectations of a rise in the
price of potatoes in world
markets
Supply of frozen
pizza
The government introduces a
tax on all high-fat frozen foods
of 10% (including pizza)
Market supply of
strawberries
The government introduces
tougher regulations on the
quality of strawberries that can
be sold in UK supermarkets
Movement
along curve
OR a shift in
the supply
curve?
(i) For a
movement expansion or
contraction?
(ii) For a shift
in supply increase or
decrease?