1.3.2 Supply

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    • Supply – the amount of a good or service that producers are willing and able to provide, at a        given price, at a given time.

      Individual supply – supply of a single producer of a certain good or service.

      Market supply – the total output of all individual suppliers of a particular good or service.

      Law of supply à the higher the price paid, the more is supplied (more profit).

    FACTORS THAT AFFECT SUPPLY

    • Changes in the cost of raw materials, which increase the costs of production and shifts the supply curve upwards and to the left. This is because as profits decrease, suppliers are less willing to make products as it is less profitable.
    • Changes in the wages paid to staff also add to the costs of production which also moves the supply curve to the left.
    • Changes in the climatic conditions which affect the production of the goods/services can reduce or increase supplies depending on the weather conditions causing les raw materials to be available etc.
    • The number of new firms that join the market changes the output of the market, as more firms produce the good/service, it will shift the supply curve to the right. As an industry shrinks the supply curve shifts to the left, both of which are long-term changes.
    • Indirect taxes also affect the supply curve as if the government intervenes, it is often to cut consumption and/or raise (government) revenue. An increase on the tax on a product shifts to the left and in effect increases the costs for the producer, which they may pass on to consumer.
    • The introduction of new technology allows the firms to produce a given item at a lower price and cut costs of production.
    • Subsidies are payments made to a producer by the government in order to encourage production as it lowers their cost of production and makes them more willing and able to produce more.

    These can be remembered using the following phrase:

    RED WINE CAN NEVER TASTE TOO STRONG

    Raw materials Wages Climate conditions New firms Tax Technology Subsidies

    Why does the supply curve slope upwards?

    • High prices encourage new firms to enter the market because it seems profitable, so total supply increases.
    • With larger outputs, firm’s costs increase so they need to charge a higher price to cover the costs.

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