1.2.6

Supply

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The Supply Curve

The supply curve shows the relationship between price (on the vertical axis) and quantity (shown on the horizontal axis).

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Incentive to expand production

  • When a firm's profits increase, it is incentivised to produce more output. This is because the more it produces, the more profit it will earn.
  • So, when costs of production fall, a firm will be incentivised to supply a higher quantity at a given price.
  • This is shown by a rightward shift in the supply curve.
  • Subsidies can lower a firms average cost per unit, encouraging them to expand production also.
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Causes of supply curve shifts

  • Changes in the price of inputs (these will affect the cost of production).
  • A discovery of a new technology (allowing the firm to produce at a lower cost).
  • Changes in Government policy.
    • E.g taxes, regulations and subsidies.
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Effect of tax on supply

  • The U.S. government imposes a tax on alcoholic drinks that collects eight billion dollars per year from producers.
  • Taxes are treated as a cost by businesses.
  • Higher costs decrease supply.
  • So taxes decrease supply.

Factors Determining the Supply of Goods and Services

There are several factors that affect the supply of goods and services in an economy, including the price of a good.

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Price of the good

  • A rise in price will almost always lead to an increase in the quantity supplied of that good or service. This is also called an extension in supply.
  • This is because the increase in price incentivises the firm to increase output.
  • Economists call this positive relationship 'the law of supply'.
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Technology and production

  • A reduction in the costs of production will lead to an increase in supply because producer profits have risen.
  • Technological improvements can increase the efficiency of the productive process.
  • This will reduce the costs of production, shifting supply to the right.
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Productivity and tax

  • Increases in productivity means the output per input of a factor of supply increases, so supply shifts right.
  • An indirect tax on supply raises the overall cost of production, shifting supply left.

Jump to other topics

1Introduction to Markets

2Market Failure

3The UK Macroeconomy

4The UK Economy - Policies

5Business Behaviour

6Market Structures

7A Global Perspective

8Finance & Inequality

9Examples of Global Policy

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