2.3 Supply

• What does supply refer to in economics?

  The willingness and ability of a firm to produce a good/service at a given price at a given time
• Why do firms supply more at higher prices?

  Higher prices lead to more profit
• What happens to quantity supplied when price increases from P to P1?

  Quantity supplied increases from Q to Q1
• What are the two types of changes in the supply curve?

  • Movement along the supply curve
  • Shift of the supply curve
• What does movement along the supply curve indicate?

  Price changes lead to movement up or down
• What is a shift of the supply curve?

  A complete movement of the curve outward or inward
• What does an extension of supply indicate?

  Price increase leads to more quantity supplied
• What does a contraction of supply indicate?

  Price decrease leads to less quantity supplied
• What is the relationship between price and quantity supplied for most goods?

  Supply curve slopes upwards due to direct relationship
• What is individual supply?

  Supply of a good by an individual producer
• What does Price Elasticity of Supply (PES) measure?

  Responsiveness of quantity supplied to price change
• What indicates price inelastic supply?

  Smaller change in quantity with price change
• What indicates price elastic supply?

  Larger change in quantity with price change
• What is the value range for price inelastic supply?

  Value between 0 and 1
• What is the value range for price elastic supply?

  Value between 1 and infinity
• What happens when PES equals 1?

  Supply is unitary elastic
• What effect does inelastic PES have on consumers?

  Harder to obtain more without higher price
• What effect does elastic PES have on consumers?

  Easier to obtain more, less price flexibility
• How can firms increase their flexibility in response to price changes?

  • Improve storage methods
  • Upgrade technology
  • Increase production capacity
  • Maintain large stock levels
  • Train employees for versatility
• What are the classifications of price elasticity?

  • Price-elastic products: PED > 1
  • Price-inelastic products: PED < 1
• What happens when price decreases for price-elastic products?

  Cutting price will increase revenue
• What happens when price increases for price-inelastic products?

  Price increases will increase revenue