2.3 Supply

• What is supply in economics?

  The quantity that sellers are willing and able to sell at a given price in a given period of time.
• Who determines supply in a market?

  Supply is determined by sellers in a market.
• How is supply defined in a product market?

  Supply is the quantity of a good/service producers are willing and able to sell at a given price over a given period of time.
• What does supply represent in a labor market?

  Supply is the quantity of worker hours workers are willing and able to sell at a given price (wage) over a given period of time.
• In the foreign currency market, what does supply refer to?

  Supply is the quantity of currency the sellers of the quoted currency are willing and able to sell at a given price in foreign currency over a given period of time.
• What is individual supply?

  Individual supply is the supply of a good/service by one producer or seller.
• Who are the sellers in a labor market?

  The sellers are workers, selling their labor to firms.
• How is market supply defined?

  Market supply is the sum of all individual supply by sellers/producers in a market.
• In a foreign currency market, who are the sellers?

  The sellers are holders of the quoted currency selling their currency in exchange for another currency.
• How does market supply depend on market definition?

  Market supply will depend on how the market is defined, with narrower definitions leading to smaller supply.
• What does the law of supply state?

  Quantity supplied will usually increase as price increases, and quantity supplied will usually fall as price falls, ceteris paribus.
• What does 'ceteris paribus' mean in the context of supply?

  'Ceteris paribus' means all other influences or factors affecting supply remain unchanged.
• What is the expected theoretical relationship between price and quantity supplied illustrated by?

  The expected theoretical relationship is illustrated with a supply curve.
• What does price elasticity of supply (PES) reflect?

  PES reflects the responsiveness of quantity supplied to a change in price of the good.
• What does the supply curve show?

  The supply curve shows the quantity that sellers are willing and able to sell at any given price in a given period of time.
• How is the slope of the supply curve typically characterized?

  The supply curve usually has a positive slope, sloping upward from left to right.
• What does the supply function represent?

  The supply function is an equation showing the mathematical relationship between the quantity supplied and the various determinants of supply for a firm.
• What factors does the supply function depend on?

  The supply function depends on price, cost of labor, cost of land, cost of capital, opportunity cost, indirect taxes, subsidies, sellers' expectations, and prices of other goods/services.
• What is a supply schedule?

  A supply schedule is a table showing the different total quantities of a good/service that producers are willing and able to sell at a range of prices over a given period of time.
• How can a supply curve be derived from a supply schedule?

  A supply curve can be drawn to show the positive relationship between price and quantity supplied while all other supply factors remain the same.
• What does a contraction of supply indicate?

  A contraction of supply occurs when there is a fall in quantity supplied due to a fall in price, ceteris paribus.
• How is a contraction of supply represented on a supply curve?

  A contraction of supply is shown by a movement along the supply curve to the left, to a lower quantity supplied.
• What does an extension of supply indicate?

  An extension of supply occurs when there is an increase in quantity supplied due to an increase in the price of the product, ceteris paribus.
• How is an extension of supply represented on a supply curve?

  An extension of supply is shown by a movement along the supply curve to the right, to a higher quantity supplied.
• What is the profit margin effect on supply?

  A rise in price is likely to lead to sellers increasing profit margins, resulting in an extension of supply.
• How does a fall in price affect profit margins and supply?

  A fall in price is likely to lead to sellers experiencing reducing profit margins, resulting in a contraction of supply.
• What is the producer substitution effect?

  The producer substitution effect is the change in quantity supplied arising from producers switching to or from producing alternative products due to a change in price.
• How does a rise in price affect producers' decisions?

  A rise in price leads to producers being more likely to switch to selling more of the product, resulting in an extension of supply.
• What happens when the price of a good/service falls?

  A fall in price leads to producers being more likely to switch to selling an alternative product, resulting in a contraction of supply.
• What do profit-maximizing producers consider when making selling decisions?

  Profit-maximizing producers consider marginal cost relative to marginal revenue when making selling decisions.
• What happens to marginal revenue as the price of a good/service increases?

  As the price of a good/service increases, marginal revenue will also increase.
• What happens as the price of a good/service falls?

  As the price of a good/service falls, marginal revenue falls, and producers are incentivized to reduce output.
• When do producers increase the quantity they are willing to sell?

  Producers increase the quantity they are willing to sell until marginal revenue equals marginal cost to maximize profit.
• What is likely to happen when there is a fall in price?

  It is likely to lead to a contraction of supply.
• What do producers do when the price of a good/service increases?

  Producers are more likely to sell more of the product.
• What do profit-maximizing producers consider when making selling decisions?

  They consider marginal cost relative to marginal revenue.
• When does a producer increase the quantity they are willing to sell?

  When marginal revenue equals marginal cost.
• What happens to marginal revenue as the price of a good/service falls?

  Marginal revenue falls, leading producers to reduce output.
• What are the non-price factors affecting supply?

  • Costs of raw materials
  • Costs of labor (wages)
  • Productivity
  • Technology
  • Interest payments (cost of finance)
  • Indirect taxes
  • Subsidies
  • Expectations of future prices
  • Number of firms in the market
  • Weather
  • Time period
• What does an increase in supply cause the supply curve to do?

  It causes the supply curve to shift to the right.