2.3 Supply

• Supply is defined as ''the ability and willingness of firms to provide goods and services at each price in a given time period''

  The Law of supply is defined as ''When the quantity supplied varies directly with it's price.''

  The time period is important as it can increase supply. As price increases, so does quantity. Higher profits are likely to be earned by firms if they supply more. Production costs may rise as output expands, so a higher price is needed to cover these extra costs.
• Individual supply is defined as ''The supply of a good or service by an individual producer.''

  Market supply is defined as ''The total supply of a good or service, found by adding all the individual producer's supply. ''
• Movements along the supply curve are a result of a change in price. Movements contract (towards the origin) or expand (away from the origin) when price and quantity change.
• Shifts of the supply curve move the whole curve to the right or left when quantity changes, and is affected by non- price factors.
• Causes of shifts of the supply curve:

  • Costs of production -> An increase means a firm would supply less at every price. An increase in an indirect tax like VAT would also lead to a rise in costs and a fall in supply.
  • A government subsidy -> This would allow the firm to supply more at every price, leading to a rightwards shift.
  • Technology -> New/ improved technology can reduce production costs and/ or increase the amount produced.
  • Climate -> This is important in agriculture. Changes in weather can lead to significant differences in how much farmers can supply each year.
• Outcomes of shifts of the supply curve:

  • Price and Quantity move in opposite directions.
  • Economies of Scale -> The ability to produce more at every price leads to a fall in average costs and the gaining of greater economies of scale. This could lead to greater profits and/or lower prices for consumers.
  • Efficiency -> Producing more with the same resources leads to greater efficiency and maybe greater productivity too.
  • Sales -> Supplying more at a lower price may lead to more sales.
  • Exports -> All the above makes a firm more competitive and increase it's ability to export successfully.
• Outcomes of movements of the supply curve:

  • Quantity supplied will move in the same direction as price. This (if an expansion) will lead to greater profits but may lead to more firms entering the market, resulting in a rightwards shift, which in turn will lead to a fall in price.
  • A fall in price is likely to reduce profits and less efficient firms may be pushed out of the market, while efficient firms may have to reduce production.
• Price Elasticity of Supply is defined as ''The responsiveness of quantity supplied to a change in the price of the product.''

  After the price of the product has changed, P.E.S shows how much supply will change as a result. There is a positive relationship between price and quantity supplied -> as price rises, firms have more incentive to produce the product as they make greater profits. BUT if price rises, by how much will supply rise as a result? This is what P.E.S measures.
• Different types of P.E.S:

  • 'Inelastic' P.E.S is ''when the % change in quantity supplied is less than the % change in price.''. This means that supply is unresponsive to changes in price.
  • 'Unit' P.E.S is when the % change in supply is EQUAL to the % change in price.
  • 'Elastic' P.E.S is ''when the % change in quantity supplied is greater than the % change in price''. This is where supply is very responsive to changes in price.
• P.E.S can be useful for consumers. Goods with elastic P.E.S often have much lower prices, so consumers pay less for the product and therefore have greater disposable incomes.
• A disadvantage of P.E.S for consumers is that consumers will find it much harder to buy goods that have inelastic P.E.S, as supply responds slowly to price changes. It can explain why some consumers have to pay very high prices for goods which have inelastic P.E.S e.g. concert tickets. Due to fixed seating capacity, concerts have perfectly inelastic supply. An increase in demand will therefore lead to very high prices *see diagram in notes*
• P.E.S can be useful for firms. If demand were to increase, knowing their P.E.S will enable firms to see what impact the resulting rise in price will have on their production/ supply. *see diagram in notes* Here, a rise in demand for the good/service (D1 to D2), leads to an increase in price (P1 to P2), but only leads to a small extension of supply (Q1 to Q2). Because of this the business wants to make their P.E.S more elastic.
• P.E.S may not be that useful for firms. Other factors such as consumer demand, awareness of competitor's actions, innovation and marketing/advertising could be more important for a firm rather than price changes, so the P.E.S data may be irrelevant for the firm's objectives.
• To conclude, the usefulness of P.E.S will depend upon how accurate and up to date the data is. For example, if the data is out of date it has no relevance regardless of the firms/ consumers use for it.