1.2.4 Supply

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    Supply – quantity of a good or service that producers are willing and able to sell at a given price
    Law of supply – as the price of a good rises, the quantity supplied also rises and vice versa

    Firms normally want to maximise profits so if they can gain a higher price for their good or service, there is a greater initiative for them to produce more
    Economic theory predicts marginal cost (cost of producing an additional unit) increases as more is produced –explained by law of DMR
    Law of DMR – if more of a variable factor of production (labour) is added to a fixed amount of capital then output (quantity) falls for each additional worker in the short-run
    Higher levels of output means increased marginal cost (as output increase, the last unit becomes more and more costly to the firm due to its relative inefficiency)
    For each unit a higher price is required to cover increase in marginal cost and give the producer an incentive to supply more to the market in order to maximise profit
    a) The distinction between movements along a supply curve and shifts of a supply curve
    Movement along = Price Factor
    Like demand – price factors lead to movements along the supply curve.
    If price goes up, a greater quantity is supplied (ceteris paribus)
    If price goes down a lower quantity is supplied (ceteris paribus)
    Shifts in the supply curve = Non – Price Factors
    Diagram below – inwards shift in supply curve through a non-price factor
    Despite price of the good or service remaining the same (P) the quantity has fallen (Q1 and Q2)

    b) The factors that may cause a shift in the supply curve (the conditions of supply)
    Determinants of Supply (non-price factors)

     

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