MrGoff.com Supply

What is a supply?

Supply is the willingness and ability of an individual or firm to supply a product at each price in a given time period. It is important to note that it is both willing and able. A firm must be able to produce the amount they say they would supply.

Supply is represented in economics by a supply curve as shown on the left. As with supply, supply curves will mostly be drawn as straight lines.

You need to be able to draw a supply curve. The key features to remember are:

The supply curve slopes upward from left to right because the lower the price of something the less willing firms are to supply it.

The supply curve should have axis labels of price(P) and quantity(Q) and the supply curve itself should be labelled(S).

Individual and market supply

Individual supply is the amount of a product one individual or firm might be willing to supply at each price in a given time period. As it is just the choice of one person or firm it can be quite volatile.

Market supply is the total supply for a product from all potential producers in the market.

The amount of grain one farmer will sell at each price in a given time is individual supply. The amount that all the grain farmers will sell at each price in a given time period is market supply.

Expansion and Contraction of supply

If the price of a product changes, then there will be a movement along the supply curve.

If the price goes up, as shown on the left, then there will be a corresponding expansion of supply.

If the price goes down, as shown on the right, then there will be a corresponding contraction of supply.

The law of supply states that price and quantity supplied are directly related i.e. if price goes up quantity supplied goes up and if price goes down supply goes down.

The law holds true because as the price is raised then existing firms might increase production to make more money. In addition, as firms produce more they will need more workers and more inputs so costs will rise so firms will need higher prices to compensate. As the price rises new firms that felt their costs were too high to make a good profit may now enter the market.

Shifts of the supply curve

There are a series of factors that might cause the entire supply curve to shift to the left or the right. A left shift of supply means there is less supply at every price and a right shift of supply means there is more supply at every price.

Factor that shifts supply	How it shifts supply
Costs of production	If a producer's costs of production go up then they will be less willing to supply goods at each price so a left shift of supply. If a producer can reduce their costs of production, then there will be a right shift of supply
Taxes and subsidies	An increase in taxes like VAT would mean supplies cost more, raising costs and leading to a left shift of supply. If the government provides a subsidy to a firm, it lowers their costs of production and so there will be a right shift of supply.
Technology	If technology is introduced that can increase the efficiency of production, then average costs will fall and producers will be more willing to supply products at each price.
Weather	The group most obviously affected by the weather is farmers whose yields may depend on the type of weather they have. Another industry heavily affected by weather is construction. Snow and rain can mean the ground is unsuitable for construction.
Increase in the number of firms in the market	If there are more firms that come into the market then there will be a right shift of supply. If a firm merges or goes out of business, there will be a left shift of supply.
Increase in size of existing firms	If existing firms grow in size by opening new stores, then total supply will increase meaning a right shift.
Government regulation	When the government introduces regulations then ensuring compliance with these increases firms costs meaning a left shift of supply.

Elasticity of supply

Type of supply	Explanation
Elastic supply	Elastic supply is when any percentage change in the price of a good will lead to a greater percentage change in the supply for the good in the same direction. If the price of a good goes up by 10% then there will be a greater than 10% increase in the quantity supplied. If it goes down by 10% there will be a greater than 10% decrease in quantity supplied. Products that are easily stored or can be produced quickly and for which the raw materials are easily obtainable will have elastic supply.
Perfectly elastic supply	Perfectly elastic supply is when any quantity of a good will be supplied at one but only one price. This is not a very realistic situation. It is difficult to think of a situation like this in real life.
Inelastic supply	Inelastic supply is when any percentage change in the price of a good will lead to a smaller percentage change in the supply for the good in the same direction. If the price of a good goes up by 10% then there will be a less than 10% increase in the quantity supplied. If it goes down by 10% there will be a less than 10% decrease in quantity supplied. Products that are hard to store, take a long time to produce or have a limited amount of supply have inelastic supply.
Perfectly inelastic supply	Perfectly inelastic supply is when a change in price will have no effect on quantity supplied. This is not a very realistic situation. I guess the closest you can get to this is something like a museum where there is no entry charge but people can make a donation if they wish.
Unitary elastic supply	Unitary elastic supply is where the percentage change in price will exactly match the percentage change in quantity supplied. This is another highly unlikely scenario in real life.

The importance of elasticity of supply

The importance to consumers

Consumers are affected by PES in a number of ways. In some cases, there is a limited supply of a product and more supply than they can cater for. This is the case with many concerts and sporting events. This means fans may have to pay higher prices and even then, still may not be able to get a ticket. Where supply is elastic there may be little chance to negotiate over price. You can get as much electricity as you like but you pay the same amount per kWh.

The importance to producers

In general producers will want to have good elasticity of supply so they can respond to changing market conditions. To improve their elasticity firms might:

* Adopt new technology or improve the technology they have.

* Add spare capacity which for a bar might mean having more staff on to cater for a greater number of people or for a factory it might mean running equipment at 80% so if there is need for a rush a job or a problem it can be dealt with promptly. A shop might add spare capacity by keeping more stock on hand.

* Improve the shelf life of products by changing their packaging.

* Ensure that staff are trained to perform multiple roles so they can more easily be deployed to the areas of greatest need at any given time. If you watch when you go on a flight you will often see some of the same people at check-in, at the boarding gate and on your flight. Because they are trained on many roles it is easier to cover if people are late or off.

Knowledge check

Questions:

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Question text

Exam style questions

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Questions

Explain what is meant by supply. (2 marks)

The willingness and ability(1) to supply goods or service at each price in a certain time period.(1)

Explain what the law of supply is. (2 marks)

The supply of a good or service is directly related to the price(1) i.e. as the price rises so does demand and vice versa.(1)

Explain how the difference between individual demand and market supply. (2 marks)

Individual demand is the amount of a good or service that an individual would buy at each price in a given time period(1)

Market demand is the total demand from all potential customers at each price in a given time period.(1)

Draw an inelastic supply curve. (2 marks)

You don't have to draw the dotted lines but you need to make sure you labelled the x and y axis and the supply curve itself.

You should have drawn something that is very steep and nowhere near 45 degrees.

1 mark for the line at the right angle, 1 mark for all the labels.

Explain what price elasticity of supply is. (2 marks)

The responsiveness of supply(1) to a change in price.(1)

Case study/Scenario

Northwest Offshore is a new British offshore wind farm that aims to be able to produce enough energy to supply the entire North West of the UK within 5 years. Because this will help the government to reach emissions targets Northwest Offshore receives subsidies from the government. Demand for energy tends to be fairly inelastic.

Analyse the consequences of these subsidies on Northwest Offshore. (6 marks)

Sample answer:

Right shift of supply with inelastic demand

A maximum of 4 marks if no correct diagram

The subsidy will lead to an increase in supply{AO1} which is a movement along the demand curve {AO2} These first two points can be obtained from the diagram.

A rise in supply is likely to lead to large reduction in equilibrium price {AO3a} and a smaller increase in demand for green energy{AO3a}. This could allow Northwest Offshore to make more profit{AO2} that can be re-invested into the business to make it more efficient.{A03a}

Additional notes:
Make sure you are in context. Here I have talked about electricity.

It's an analyse question so you are looking to provide a piece of knowledge. Then you need to apply it twice and analyse what that means. Here showing the effect on equilibrium price and quantity is one application and discussing the potential effects for the company is the other.

There is no need for a concluding statement.

Case study/Scenario

Sophia runs a home made Gelato shop on the beachfront in the popular tourist resort of Beachington Heads. She makes all the ice cream herself for the shop. Most have her sales are made in the spring and the summer where Sophia thinks the most important factor in how well she do is the weather with more people wanting a gelato in good weather. In addition the town host an annual music festival which sees thousands of festival goers visit the local area. During the festial and on some particularly warm summer days Sophia runs out of some of her best selling flavours of ice cream. Her shop is only small and to be able to put in more refrigerated storage would require her to apply for and build an additional refrigerated storage unit onto the back of the business.

Evaluate the importance of price elasticity of supply to Sophia. (6 marks)

Sample answer:
Sophia is in a situation where demand will fluctuate. There will be a lot of people when the festival is on and when it is warm and less when it is the cooler months or raining.{AO2}this means it is important for her to be able to supply more ice cream at times of high demand such as sunny summer days and during the festival.{AO3a} This might mean having more ice cream on hand so that she doesn't run out of people's favourite flavours leading to lost sales, disappointed customers and poor reviews. This may mean fewer customers in the future.{AO3a}

However, if she is unable to get permission to expand the storage{AO3b} or if the cost of making the changes to the store cannot be justified for the one off festival when a lack of sunshine may mean there is little need for it in the summer.{AO3b}

In general it would normally be important for Sophia to increase her PES and take advantage of the warm days and the music festival but if the costs are high compared to the income she can make or if she can't get permission to expand then it is not as important.{AO3b}

Additional notes:

Context is achieved by talking about ice creams and referencing facts from the scenario like the festival and running out of ice cream.

This is a slightly different type of evaluate. You wouldn't say price elasticity isn't important for anyone. It's always best to be able to adjust to the demand you get. So in this case to evaluate it we are saying to what extent does it matter.