Topic 3: Supply
1
Introduction
Supply is the quantity of a good or service that firms are able and willing to
supply at a certain price over a certain period of time.
1.1
As with demand, a distinction is made between:
• an individual firm’s supply, which is the quantity of the good that the firm
is willing and able to supply at a certain price; and
• market supply, which is the total quantity of the good that all firms in the
market would be willing and able to supply.
2
Supply and output may not be the same
In a particular period, output may be greater than supply, i.e. stocks are being
increased, or output may be greater than supply, i.e. stocks are being run
down.
2.1
Stocks may be built up in readiness for unexpected or urgent orders, or to ev en
out the need for seasonal fluctuations of output, e.g. fireworks, ice cream.
However, holding stocks involves costs – warehouse costs, opportunity cost of
capital tied up in stocks, loss of goods through deterioration or obsolescence.
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Factors affecting supply
3.1
Price. As the price of a product rises its supply rises (ceteris paribus). This is
because:
(a)
(b)
existing producers are willing to supply more as they earn a higher profit
per unit and,
new firms enter the market as it now becomes pro fitable for less
efficient firms to produce.
Price and supply data may be shown in a table:
Price per pint
£1.10
£1.50
£1.80
£2.00
Bannerman High School
Higher Grade Economics
Unit 3 Summary (Theory of Supply)
Quantity supplied per day (pints)
10,000
20,000
30,000
40,000
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or in a graph:
Note that a change in supply resulting from a change in price is shown by a
movement along the supply curve.
3.2
Prices of other commodities
• Competitive supply – a farmer switching resources away from supplying
one product, e.g. milk, to supplying more of another, e.g . wheat, in
response to a fall in the price of milk
• Joint supply – a rise in the price of one commodity may encourage an
increase in its supply and the supply of joint products, e.g. an increase in
the price of petrol may lead to an increase in the supp ly of other oil
products such as bitumen, etc.
3.3
Costs of production
• A fall in the cost of any factor of production will lead to an increase in
supply.
• A change in a tax or subsidy will also change the costs of production.
3.4
Change in availability of resources
Bannerman High School
Higher Grade Economics
Unit 3 Summary (Theory of Supply)
2
3.5
Note that any of the changes (in the ceteris paribus conditions) outlined in
paragraphs 3.2 to 3.4 is represented by a shift in the supply curve.
Change in supply condition
Bannerman High School
Higher Grade Economics
Unit 3 Summary (Theory of Supply)
3
Higher only
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Price elasticity of supply
Price elasticity of supply is a measure of the responsiveness of supply of a
good or service to a change in its price, i.e. it measures how suppliers react to
a change in the price of their product.
% change in supply
Price elasticity of supply =
% change in price
If price elasticity is greater than 1, then supply is price elastic. Supply is very
responsive to a change in price.
If price elasticity is less than 1, then supply is price inelastic. Supply is not
responsive to a price change.
If price elasticity is zero, i.e. if supply did not or could not change in response
to a price change, then supply is said to be perfectly inelastic.
4.1
Factors affecting elasticity of supply
Time
The length of the time period being considered has an important effect.
Short run
(a) In the very short run, if a firm is operating at full capacity it will be
unable to respond to an increase in price. Supply will be perfectly
inelastic. The supply curve would be a vertical straight line.
(b)
If the firm has spare capacity and stocks then it will be able to increase
supply. The more spare capacity or the more goods it has in stock then
the more elastic will be its supply.
Bannerman High School
Higher Grade Economics
Unit 3 Summary (Theory of Supply)
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Long run
In the long run, supply will be elastic. Firms have time to increase their
capacity and new firms can enter the industry.
Bannerman High School
Higher Grade Economics
Unit 3 Summary (Theory of Supply)
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