Unit 2.2 - Supply

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Adding extra units of a variable factor to a fixed factor leads to a decrease in additional output from each unit.HL

diminishing marginal returns

backward-bending labour supply curveHL

A situation in some labor markets where individuals may choose to supply less labor as wage rates rise significantly, due to the income effect outweighing the substitution effect. This creates a curve that bends backward at higher wage levels.

marginal costHL

The additional cost incurred by producing one more unit of output, which rises as production increases due to diminishing marginal returns. This concept explains why firms will only supply more output if the market price is high enough to cover these increasing costs.

The additional expense incurred from producing one more unit of a good, which typically rises due to diminishing returns.HL

marginal cost

market priceHL

The price at which goods are bought and sold in a market, which influences the quantity supplied. Firms are willing to increase production only if the market price exceeds the increasing marginal costs of production.

existing firms

Firms already operating in the market that can increase production in response to higher prices, leading to greater quantities supplied. This behavior is driven by the potential for higher profit margins as prices rise.

new firms

Firms that enter the market in response to higher prices and profit margins, motivated by the opportunity to cover production costs and earn profits. Their entry increases overall market supply.

production

The process of creating goods and services, which firms are incentivized to increase when prices rise, allowing them to cover costs and earn profits.

A time frame in which at least one factor of production remains fixed while others can vary.HL

short run

In this time period, all factors of production can be adjusted and none are fixed.HL

long run

The principle that additional input will lead to reduced incremental output after a certain point.HL

The law of DMR

fixed factors of productionHL

Inputs that remain constant in the short run, such as capital. These factors do not change with the level of output, affecting how variable inputs can be utilized.

marginal returnsHL

The additional output gained from employing one more unit of a variable input while keeping at least one input fixed. The law of diminishing marginal returns states that this additional output will eventually decline.

variable inputHL

A factor of production that can be changed in the short run, such as labor or raw materials, while at least one factor remains fixed. The use of more variable inputs leads to diminishing marginal returns as output increases.

A shift in the supply curve caused by a non-price factor.

Change in supply

Change in quantity supplied due to price variation.

Movement along a supply curve

The aggregate of all individual supply of a product at each price level.

market supply curve

The principle that adding inputs reduces extra output eventually.

The law of diminishing marginal returns (DMR)

CISTERN

An acronym representing non-price determinants of supply: Costs of production, Indirect taxes, Subsidies, Technological change, Expectations of future prices, Related products, and Number of firms.

Contraction (of supply)

A decrease in the quantity supplied of a good or service that occurs when its price falls. This reflects a movement along the supply curve.

Expansion (of supply)

A situation where the quantity supplied of a good increases due to a rise in its price, following the law of supply. This is represented as a movement along the supply curve.

government subsidies

Financial assistance provided by the government to support businesses, which can lower production costs. This support can shift the supply curve to the right, indicating an increase in supply.

A decrease in quantity supplied caused by a lower product price.

Contraction in the quantity supplied

An increase in quantity supplied due to a higher product price.

Expansion in the quantity supplied

Factors influencing supply aside from the price level.

Non-price determinants of supply

Government financial support aimed at increasing production.

Subsidies

Government-imposed charges on spending rather than on income.

indirect taxes

The less significant output resulting from joint supply, such as wool or milk from sheep.

by-product

The situation where the production of one good results in the creation of additional products as by-products.

joint supply

When the output of one product limits the output of alternatives due to resource competition.

Competitive supply

Factors of production (FOPs)

The inputs used to produce goods and services, which include labor, capital, land, and entrepreneurship. Changes in their costs can shift the supply curve.

number of firms

The quantity of firms operating in an industry, which is influenced by market size. An increase in market demand typically leads to more firms entering the industry, thereby affecting overall supply.

technology

Advancements that improve production efficiency, allowing firms to supply more goods at every price level, often leading to a rightward shift in the supply curve.

A diagrammatic representation of the relationship between quantity supplied and price, typically shown as an upward sloping line.

supply curve

The total quantity supplied by all producers at various price levels for a specific product.

market supply

Individual supply

The quantity of a good or service that a single producer is willing to supply at various price levels. It is summed across all producers to determine market supply.

Upward-sloping

The characteristic shape of a supply curve, indicating that as prices increase, the quantity supplied also increases. This reflects the law of supply.

wage rates

The amount paid to workers per unit of time or work, which influences the supply of labor, as higher wages encourage more individuals to offer their services.

The quantity of goods or services that firms are willing and able to sell at any given price, per time period.

Supply

There is a positive correlation between the quantity supplied of a product and its price, assuming all else remains constant.

Law of supply

profit margins

The difference between the cost of producing a good or service and its selling price, which increases with higher prices, encouraging firms to supply more.

quantity supplied

The amount of goods or services that firms are willing and able to sell at a given price during a specific time period, which increases with higher prices due to greater profit margins.