How Markets Work - Introductory Supply Concepts

Some core revision notes on the basic economics of supply and elasticity of supply in markets.

What is meant by?

Bottleneck

Any factor that causes production (supply) to be delayed or stopped

Competitive supply

Alternative products a firm could make with its resources. E.g. a farmer can plant potatoes or carrots depending on the price

Elasticity of supply

Responsiveness of supply to a change in market price

Excess supply

When there are unsold goods in the market

Indirect taxes

A tax on suppliers causes inward shift of supply e.g. the sugar tax

Investment

Investment in capital goods such as new plant and machinery, new factories and technologies – the effect is usually to increase supply capacity at each price

Joint supply

When increase/decrease in supply of one good leads to an increase/decrease in supply of a by-product

Law of supply

Positive relationship between market price and quantity supplied

Market supply

Total supply brought to the market by all of the producers at each price

Profit motive

Higher prices increase the potential for making higher returns for shareholders

Spare capacity

Measures the extent to which a producer, industry, or economy is operating below the maximum sustainable level of production

Stocks

Also known as inventories, unsold finished or semi-finished products

Subsidies

Government financial support to producers (e.g.farmers) that causes an outward shift of supply

Supply

Quantity of a good or service that producers are willing and able to supply to a market at a given price

Technological improvement

Advances in the state of production technology e.g. the use of artificial intelligence, robots and 3D printers that might increase a firm’s supply potential and lower costs.

Elasticity of Supply

PRICE ELASTIC SUPPLY

Quantity supplied is responsive to a change in price (PES >1)

PRICE INELASTIC SUPPLY

Quantity supplied is not responsive to a change in price (Pes <1)

PERFECTLY PRICE ELASTIC SUPPLY

When supply is perfectly responsive to price PES is infinity

PERFECTLY PRICE INELASTIC SUPPLY

When supply does not change at all when price changes, PES=0

SHORT RUN

A time period when there is at least one fixed factor input

LONG RUN

A time period when all inputs are variable and the scale of production can change

3-2-1

Give me 3 determinants of price elasticity of supply:

1. Availability of stocks
2. Complexity of production and length of time for supply to get to market
3. Mobility of factors of production such as labour and capital

Give me 2 reasons why supply of manufactured goods is more elastic than agricultural goods:

1. Mass production along fully-integrated assembly plants
2. Easier to stock raw materials and component parts

Give me 1 example of a product whose supply might be assumed to be perfectly inelastic:

1. Seats in a sports stadium, theatre or cinema