2.3 Supply

DEFINITIONS:

1. indirect taxes: a tax on goods and services
2. subsidies: payment from the government to a firm, which offsets their cost of production, thus incentivising increased production for a specific good
3. competitive supply: when goods are in competitive supply, firms can choose to produce either good with their existing factor of productions
4. joint supply: when goods are produced at the same time, as one of the goods is a by-product in the production process

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Explain

2.3.1 The relationship between price and quantity supplied

In economics, the relationship between price and quantity supplied is illustrated by the supply curve, which typically slopes upwards from left to right. This positive relationship indicates that as the price of a good or service increases, the quantity supplied also increases, and vice versa. The rationale behind this is that higher prices provide an incentive for producers to increase production because they can achieve higher revenue and potentially greater profit.

Explanation:

1. Law of Supply: The law of supply states that there is a direct relationship between price and quantity supplied. As price rises, quantity supplied increases, and as price falls, quantity supplied decreases.
2. Incentive for Producers: Higher prices signal greater potential profitability, motivating producers to supply more. Conversely, lower prices reduce potential profits, leading producers to supply less.
3. Diagram Description: The supply curve (S) is typically upward-sloping. The horizontal axis (X-axis) represents quantity supplied, while the vertical axis (Y-axis) represents price.

Diagram:

Below is a simplified diagram of the supply curve:

Key Points in the Diagram:

• Upward-Sloping Supply Curve (S): This shows that as price increases from P1 to P2, the quantity supplied increases from Q1 to Q2.
• Movement Along the Curve: This demonstrates the change in quantity supplied due to a change in price, keeping all other factors constant (ceteris paribus). This positive relationship between price and quantity supplied reflects producers' behaviour in the market, driven by the potential for increased profit at higher prices.

2.3.2 Individual and market supply

Individual Supply:

Individual supply refers to the quantity of a good or service that a single producer is willing and able to supply at different prices over a given period of time. The individual supply curve shows the relationship between price and the quantity supplied by one producer, typically upwards sloping, indicating a direct relationship between price and quantity supplied.

Market Supply:

Market supply is the total quantity of a good or service that all producers in a market are willing and able to supply at different prices over a given period of time. The market supply curve is derived by horizontally summing the individual supply curves of all producers in the market. It also typically slopes upwards, reflecting the law of supply.

2.3.3 Joint and competitive supply

Joint Supply

Diagram for Joint Supply:

Explanation of Diagram:

• As the quantity of beef increases due to higher prices, the supply of leather also increases.
• This is because it is now more profitable to produce beef
• There is also an increase the supply of leather produced as it is a by-product of beef production

Competitive Supply

Diagram for Competitive Supply:

These diagrams and explanations illustrate the concepts of joint and competitive supply, highlighting the interdependence and resource competition in production.

2.3.4 Movements along the supply curve (extension/contraction)

Diagram:

Below is a simplified diagram illustrating movements along the supply curve:

Key Points in the Diagram:

• Supply Curve (S): This is the upward-sloping line representing the relationship between price and quantity supplied.
• Extension of Supply: When the price increases from P1 to P2, the quantity supplied increases from Q1 to Q2. This movement is shown by moving up along the supply curve.
• Contraction of Supply: When the price decreases from P2 to P1, the quantity supplied decreases from Q2 to Q1. This movement is shown by moving down along the supply curve.

2.3.5 Shifts of the supply curve (increase/decrease)

A shift in the supply curve represents a change in the quantity supplied at every price level, due to factors other than the price of the good or service. These factors are called non-price determinants of supply. An increase in supply shifts the supply curve to the right, while a decrease in supply shifts the supply curve to the left.

Factors Causing Shifts:

Diagram:

Below is a simplified diagram showing both an increase and a decrease in supply.

Key Points in the Diagram:

• Rightward Shift (Increase in Supply): When supply increases, the supply curve shifts right from S1 to S2, indicating that at each price level, a greater quantity is supplied.
• Leftward Shift (Decrease in Supply): (Not shown in the diagram but conceptually) If supply decreases, the supply curve shifts left from S1 to S3 (not drawn), indicating that at each price level, a smaller quantity is supplied.