2.3 Supply

• Supply


  The amount of a product put onto the market by firms at various prices in a particular time period
• Firm


  An organisation that brings together various factors of production and organises production processes to produce output
• Forms of firm organisation

  • Sole trader
  • Partnership
  • Private Limited Company
  • Public limited company
• Supply is in the hands of producers / firms
• Supply seeks to satisfy the (unlimited) wants of consumers
• Profit


  The difference between total revenue and total cost
• Price rises


  Firms increase supply as revenue rises
• Price falls


  Firms supply less as revenue falls
• Firms aim to combine the factors of production in the most efficient and profitable way
• Not all firms seek to maximise profit
• Economists define profit differently to accountants
• Individual supply


  The amount of a good or service that an individual firm (supplier) is prepared to offer for sale at any given price over a period of time
• Market supply


  The sum of the supply by every firm in a market
• Joint supply

  Production of one good automatically leads to supply of another
• Competitive supply


  The supplier can only supply more of one product by producing less of another
• Supply curve


  Shows the relationship between the quantity supplied and the price of a product
• Law of supply

  As the price of a good rises, quantity supplied also rises
• Price rises


  Quantity supplied rises as businesses can now make profit
• There is a normal positive relationship between price and quantity supplied
• Extension in supply

  A rise in supply caused by an increase in price
• Contraction in supply


  A fall in supply caused by a decrease in price
• Changes in factors will shift the supply curve
• Factors affecting supply

  • Costs of Production
  • Technology of production
  • The price of other related goods
  • Government Policy (taxes and subsidies)
  • Firms expectations about future prices
  • The size (number of firms in the market) and nature of the industry
  • Other Factors (e.g. weather, health scares)
• Increasing input costs


  Reduces supply
• Increasing wage costs


  Reduces supply
• The extent of supply change depends on the proportion of the increasing cost to total costs
• Improvements in technology

  Reduces production costs, increasing willingness to supply at a given price
• Increase in price of Beef

  Increases supply of leather (joint supply)
• Increase in price of organic swede relative to potatoes

  Increases supply of organic swede (competitive supply)
• Composite supply


  A product produced by a firm serves more than one market
• Increase in indirect taxes

  Reduces supply
• Increase in government subsidies

  Increases supply
• Changes in rules/regulations can impact willingness to supply
• In a competitive industry, small cost changes can have a big impact on supply
• In an industry with strong brand loyalty, cost increases can usually be passed onto consumers
• The number of firms entering or leaving a market will impact supply
• Firms make supply decisions based on expected future prices