What makes a market?
What should firms supply?
AS Business
Unit 1
Lesson Objectives
• To be able to identify the relationship
between; price and supply.
• To be able to discuss factors affecting supply
• To be able to answer a past paper question
based on the theory
Starter
• When was the last time you went to a shop
and they had sold out of what you wanted to
buy? Are you affected by supply?
Definition of supply
• Supply is the amount of goods and/or services
a firm is willing to produce/provide at a given
price.
Supply – how government intervention
can affect levels of supply
• If the government lowers tax
• This makes production costs lower
• This means that firms will make
higher profits
• Higher profits will signal to other
producers to enter the market and
produce more
• This also means that lower costs may
mean lower prices for the consumer
Factors affecting supply
• If the price of goods increases – how will
producers react?
– More profit signals that producers should expand
production
– Producers will take advantage of higher profits by
supplying more
In general if prices rise then the quantity supplied
will also rise
We will see movement along the supply curve to
the right
• Data shows price increases, which way will
the supply curve move?
The supply curve and…
Price vs other factors
• If the price increases
(movement along right)
• If the price decreases
(movement along left)
• For ALL other factors the
supply curve SHIFTS
completely
S
P
Q
You must
understand this
concept it is key
to your Unit 1
Non-price factors which influence
supply– costs of production
• Rise in the costs of production will
mean that at any given
output the firm will have to
charge higher prices
• The cause of the change in
the supply curve is costs and
not price therefore the
curve shifts
• In this case the curve shifts
upwards
S1
P
S
Q
Recap – to shift or not to shift?
Ask yourself this question…
What was the cause of the change in
supply?
Price? – Movement along
Any other cause? – shift completely
Non-price factors which influence
supply– costs of other goods
• Changes in the price of some goods
can affect the supply of other goods
• Example: if price of beef increases
then there will be an increase in the
quantity supplied and more cattle
will be slaughtered
• This will mean more leather hides –
so the quantity of leather supplied
will increase
• PRICE OF BEEF GOES UP – SUPPLY OF LEATHER
INCREASES
Non-price factors which influence
supply– Technology
• Supply curve is normally drawn on
the assumption that technology
remains unchanged but this is not
the case. (Or you would still have a
phone that just texted)
P
• New technology in a business can
mean better productive efficiency (how
well and how fast it produces stuff)
• A firm will want to produce more
and may pass the savings onto the
consumer with a lower price so the
demand curve shifts down
S
S1
Q
Non-price factors which influence
supply– Other factors
• Government legislation (laws
which raise the cost of production
e.g. pollution)
• Tax changes, business either
absorbs the cost or passes it on to
the consumer raising prices
• Weather – which is critical in
agribusiness
• Cost of raw materials
• Natural disasters Video Tsunami
and Toyota
Sample question 1
If the price of Apple iPhones increases, the
company would be willing to supply more because
A producing Apple iPhones had become more
profitable
B costs of producing iPhones had recently increased
C VAT on mobile phones had increased
D prices of competitors’ mobile phones had fallen
[4]
Answer question 1
Correct Answer is A - Producing Apple iPhones had become more
profitable
Supply is the amount of goods and/or services a firm is willing to
produce/provide at a given price (1 mark)
- When prices increase, it implies that is becomes more profitable to
supply more phones (1 mark)
- as Apple is a profit maximizing company, quantity supplied will
therefore increase (1 mark)
- if costs increase, profits may fall if revenue stays the same, which will
therefore not increase supply (1 mark)
- VAT will increase prices for consumers and is therefore going to affect
demand not explain supply (1 mark)
Sample question 2 (progress)
During 2009, it was reported that a number of Maclaren
baby buggies had a design fault, which made them
dangerous to use.
Which one of the following would be an immediate
consequence of the above?
A An increase in price
B An increase in supply
C A fall in demand
D A fall in profits
[4]
Answer question 2
Correct answer is C - fall in demand
- The poor reputation of the buggies would cause
consumers to switch to safer products (1 mark)
- Prices may fall, not increase, once retailers recognised
the fall in demand (1 mark)
- It would be pointless if Maclaren or retailers were to
increase supply as fewer, if any, would be sold (1 mark)
Sample question 3
Prices in the computer games console market are
affected by both supply and demand factors.
An increase in which one of the following is most likely to
lead to a decrease in the price of computer games
consoles?
A The salaries of console designers
B The rate of sales tax
C The supply of components for manufacturing consoles
D Promotional costs of computer games console retailers
Answer question 3
Correct answer is C – the supply of components for the consoles
- Definition of demand and or supply (1 mark)
- Use of accurate supply and demand diagram (1 mark) with a right
shift in the supply curve (1 mark)
- An increase in the supply of components is likely to lead to lower
costs (1 mark)
- Lower costs will be passed on to the consumer in the form of lower
prices (1 mark)
- Provided that the manufacturers do not take advantage of lower
costs by increasing their profits (1 mark)
- Other factors A, B and D lead to increases in demand or reductions in
supply which should increase prices (1 mark)
Sample question 4
Assess the likely impact of the following two
factors on the supply of shoes in the UK:
(a) changes in technology [4]
(b) actions of the UK government. [4]
• Knowledge (1), Application (1), Analysis (1), Evaluation (1) x 2
• Knowledge: 1 mark for definition of technology/actions of
government, e.g. better manufacturing equipment using digital or
computer aided equipment/actions of government described as
legislation or fiscal policy
• Application: 1 mark the answer must be contextualized, e.g. if the
government decreases corporation tax on profits for small /
manufacturing businesses then this should reduce costs
• Analysis: 1 mark the candidate must identify and explain the
consequences of changes in technology/actions of the UK
government, e.g. lower costs of production may lead to higher
profits which should help attract new shoe manufacturing
companies to set-up in business/relocate to the UK
• Evaluation: 1 mark the candidate must present a discussion on the
effects of changes in technology/actions of the UK government, e.g.
it will also depend on other factors such as wage costs which may
be relatively high so supply may not increase since costs overall may
not fall
• e.g. if the digital technology / computer-aided manufacturing
equipment cannot be afforded then supply of shoes in the UK will
not increase and shoes will continue to be imported from low-cost
labour countries