Determinants of Supply

Supply refers to the amount that producers are willing and able to sell at any given price. The supply curve shows this relationship between price and quantity supplied. It slopes upwards from left to right, because, as price rises, producers will supply more because of the potential for higher profit (think about delivering newspapers — if you were paid £1 an hour, you wouldn’t do the work, but you might if you were paid £10 an hour).
supplycurve

When there is an increase in supply of a good or a service, we can say that people will be willing to buy more of that particular good or service with a given price. Therefore the supply curve will shift to its right.

Factors causing supply to shift to its right right:
• an increase in productivity
• improvement in technology for production
• increased availability of materials
• a fall in price of raw materials
• a fall in labour/capital costs
• introduction of a subsidy
• a rise in the number of firms in the industry

When there is a decrease in supply of a good or a service, we can say that people will be willing to buy less of that particular good or service with a given price. Therefore the supply curve will shift to its left.

Factors causing supply to shift to its left:
• a fall in productivity
• reduced availability of raw materials
• a rise in price of raw materials
• a rise in labour/capital costs
• imposition of a tax
• a fall in the number of firms in the industry.

A very important point: a change in the price of the good leads to a movement along the supply curve, not a shift of the supply curve.

Taxation
Governments impose taxes on goods for a number of reasons, such as trying to reduce production of
a good as it may cause pollution or threaten the health of consumers (eg cigarettes), and the need to
raise tax revenue in order to fund public services such as schools and the NHS.

Taxation has has a negative effect on the supply, shifting the supply curve to the left. Taxation can also increase price of raw materials.

tax

Price elasticity of supply (PES) — the responsiveness of supply to a change in price. Like PED, the steeper the supply curve, the more price inelastic (unresponsive) the supply. It is always a positive number. A number between 0 and 1 means the good has price inelastic supply; between 1 and ∞, the good has price elastic supply. A good has price inelastic supply if it is complex to make, raw materials are scarce, the production process is lengthy and we are considering the short-run (the period of time over which the quantity of some factors of production is fixed). Supply is price elastic when the good is quick and easy to make, and we are considering the long run (the period of time over which all factors of production are variable). The formula for PES is:

% change in supply
——————————————-
% change in price

Source: Adapted from Edexel Tutor Support Materials with some modifications.

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