Download 1.2.2 supply student version

Supply
Q: Why is advice so cheap?
A: Because supply always exceeds
demand.
1.2.2 Supply - syllabus
Candidates should be able to:
• Define supply
• Explain how a change in price causes a
movement along a supply curve
• Assess factors which may cause a shift in
supply (changes in the cost of production,
introduction of new technology, indirect
taxes, government subsidies and external
shocks).
Definition of actual and planned supply
What is supply?
It is the amount of goods or services
____________ plan to offer for sale at each
given price level.
Planned supply may be different from
actual supply (realised supply) because if
consumers do not want to buy as much as
producers are prepared to sell then
producers will limit their output.
The theory of supply
In theory, at higher prices a larger quantity
will generally be supplied than at lower
prices, ceteris paribus, and at lower prices
a smaller quantity will generally be supplied
than at higher prices, ceteris paribus.
So we have higher supply at higher prices
and vice versa.
Again, it is important to assume that ‘all
other things remain constant’.
What does the supply show?
The supply curve shows the relationship
between the amount offered for sale and
the price.
What is the main objective of firms?
So what can they gain as prices rise if they
increase their supply?
Why is the supply curve upward sloping?
Firms will make ______ profits as the price
per unit sold increases. So as the prices
increase it is in the firm’s interests to make
_______
When prices rise this sends a signal to
firms that there is a shortage and it creates
an incentive to them to increase supply.
So the supply curve slopes upwards as
higher prices provide an incentive for firms
to produce more.
Movement along a supply curve
Movements along the supply curve are
caused by changes in price. This is called
an extension in supply when the quantity
supplied increases as the price increases.
A contraction in supply is when the reverse
happens; as price falls the quantity
supplied falls.
What happens to the supply curve if factors
OTHER than price change?
If something happens that increases a
firm’s costs regardless of the price level
(e.g. an increase in taxes or an increase in
materials or wages), then the firm’s supply
curve will shift to the ______
This is because if costs were higher but
prices remained the same then firms would
make ______ profit and so some would
________ production.
Supply and lower costs
Similarly if something happens that
decreases a firm’s costs (e.g. a subsidy
from the government) then the firm’s supply
curve shifts to the right.
Why?
What factors shift the supply curve?
Changes in income and supply
Shifting the supply curve
NOTE – if incomes change this will shift
demand but not supply. A change in
demand will cause a movement along the
supply curve not a shift.
So changes in income (e.g. increased
economic growth) or increased demand for
certain goods will NOT SHIFT the supply
curve as they won’t affect the costs for
firms.
Physical constraints
Between January 2004 and August 2008,
the price of copper rose from $2,500 to
$8,000 a tonne. Why did firms not produce
more copper?