Supply

Supply is the amount of a good or service that a producer is WILING and ABLE to produce over a SPECIFIED PERIOD OF TIME

Supply and Price

There is a positive relationship between price and supply.

When price rises, producers are willing and able to supply more of a good or service because the potential to make profit is greater

When price falls, producers are less willing and able to supply a good or service because they will make less profit from it.  They may wish to re-allocate their scarce resources into more profitable uses.

Supply Curve

A change in price will lead to a MOVEMENT along the supply curve.

A rise in price from £1 to £.50 will lead to a movement from B to C and an EXTENSION in quantity supplied

A fall in price from £1 to 50p will lead to a movement from B to A and a CONTRACTION in quantity supplied

The Conditions of Supply

These are the non-price factors that affect supply.  They do so because they affect the firm’s willingness and ability to supply.

(1)    COSTS OF PRODUCTION

The higher the costs of production, the lower the profit margins will be.  When costs increase, supply will be fall. When costs fall, supply will increase

(2)    TAXES AND SUBSIDIES

A tax is a sum of money that a business has to pay to the government.  Tax acts like an extra cost of production.  If taxes rise, profits fall and supply will decrease.  If taxes fall, profits will increase and supply will increase

A subsidy is a sum of money that the government gives to a business.  This is usually to encourage the firm to do something that brings external benefits, for example training or re-locating in an area of high regional unemployment.  A subsidy is an additional source of revenue for the firm.  It therefore increases profit and increases the willingness to supply

(3)    TECHNOLOGY

Technology means new capital.  New capital can increase supply because it makes firms more physically able to produce more AND because it might make production cheaper, thus increasing profits and willingness to supply

(4)    NATURAL FACTORS

Primary products will be particularly affected by things such as climate and natural disasters

Changes in the conditions of supply cause SHIFTS in the supply curve:

Price Elasticity of Supply

Price Elasticity of Supply measures how responsive supply is to a change in the price of the product.  There are 3 alternatives.

(1)    PRICE ELASTIC SUPPLY: A % change in price leads to a bigger % change in quantity supplied

(2)    PRICE INELASTIC SUPPLY: A % change in price leads to a smaller % change in quantity supplied

(3)    UNITARY ELASTICITY OF SUPPLY: A % change in price leads to an equal % change in supply

The factors affecting price elasticity of supply

Supply is more likely to be price elastic if. ..	Supply is more likely to be price inelastic if...
The production process is short- eg making cakes	The production cycle is long- eg building houses, growing crops
The firm is currently operating under capacity and has spare resources to put into extra production	The firm is already operating at full capacity
The firm makes a range of similar products- resources can be switched from one product to another	The firm cannot easily switch resources from other products
In the long term.  As time goes on, firms have time to hire new workers, buy more supplies, lease bigger premises etc	In the short term- firms do not have the ability to quickly get hold of the resources that they need to increase production

Market Forces and the allocation of resources

In a free market economy, the interaction of demand and supply will determine how much of different products are produced and at what price.

Prices, and equilibrium outputs will only change when there are changes in market conditions.  This means that there are changes in demand and supply.

Maximum and Minimum Prices

Sometimes the equilibrium prices reached by market forces may be considered to be too high or too low.

The government may decide to intervene to introduce a minimum or maximum price

Maximum Prices

·         Introduced when the government feels that market prices are too high

·         The government introduces a maximum price, above which prices are not allowed to go

·         For example, the government has, in the past, set a maximum price for rented accommodation to ensure that everyone has access to shelter

Benefits of a maximum price

Potential Problems

Theoretically keeps prices down so allows more people to have access to the good and services

May make the situation worse.  At the lower price, landlords are less likely to provided rented accommodation (supply falls) but more people want it.  This creates excess demand (a shortage)

Stops firms from exploiting consumers with high prices for necessity products

Minimum Prices

·         Introduced when the government is concerned that market prices may go too low

·         The government introduces a minimum price, below which the market price cannot go

·         Examples include: minimum prices in agriculture; the minimum wage

·         Some people think that the government should introduce a minimum price for alcohol to deter consumption and reduce external costs

Possible benefits of a minimum price	Possible costs of a minimum price
Minimum wage avoids exploitation of labour	May backfire and price people out of the market.  The higher price will contribute to excess supply
Minimum price in agriculture ensures that farmers stay in the market and secures domestic supply of primary commodities
Minimum prices of demerit goods can reduce the consumption of goods with external  costs (eg alcohol)