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Questions and Answers
What causes an expansion of supply along the supply curve?
What causes an expansion of supply along the supply curve?
Which factor would cause an inward shift of the supply curve?
Which factor would cause an inward shift of the supply curve?
Which of the following statements is true regarding supply curves?
Which of the following statements is true regarding supply curves?
What does the mnemonic PINTSWC represent?
What does the mnemonic PINTSWC represent?
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If a firm experiences an increase in productivity, what is likely to happen to the supply curve?
If a firm experiences an increase in productivity, what is likely to happen to the supply curve?
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Which of the following would NOT shift the supply curve?
Which of the following would NOT shift the supply curve?
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What outcome does a favorable weather condition have on agricultural supply?
What outcome does a favorable weather condition have on agricultural supply?
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The inward shift of the supply curve can result from which of the following factors?
The inward shift of the supply curve can result from which of the following factors?
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What does a price elasticity of supply (PES) value greater than 1 indicate?
What does a price elasticity of supply (PES) value greater than 1 indicate?
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What characteristic best describes inelastic supply?
What characteristic best describes inelastic supply?
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Which statement accurately reflects the relationship between price changes and supply adjustments in elastic supply?
Which statement accurately reflects the relationship between price changes and supply adjustments in elastic supply?
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If a firm experiences an inelastic supply, what is the likely outcome if demand significantly increases?
If a firm experiences an inelastic supply, what is the likely outcome if demand significantly increases?
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Why is understanding price elasticity of supply important for firms?
Why is understanding price elasticity of supply important for firms?
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Study Notes
Supply Curve Overview
- Supply curves slope upward due to the profit motive; higher prices increase potential profits, prompting firms to supply more.
- As prices rise, new firms enter the market, further increasing overall supply.
- Increased production outputs lead to higher costs for firms, necessitating higher prices to cover these costs.
Movements Along the Supply Curve
- A price decrease from P1 to P2 results in a contraction of supply, leading to a decrease in quantity supplied from Q1 to Q2.
- A price increase from P2 to P1 induces an expansion of supply, increasing quantity supplied from Q2 back to Q1.
- Movements along the supply curve are strictly due to changes in price, influenced by firms' desire for profit.
Shifting the Supply Curve
- Supply curve shifts occur independently of price changes.
- An outward shift (from S1 to S2) indicates an increase in supply at the same price level, while an inward shift (from S3 to S1) indicates a decrease.
Factors Influencing Supply Curve Shifts (Mnemonic: PINTSWC)
- P - Productivity: Higher productivity reduces average costs, causing an outward shift.
- I - Indirect Taxes: Increase in taxes leads to an inward shift in supply.
- N - Number of Firms: More firms in the market result in a larger overall supply.
- T - Technology: Advancements in technology can lead to an increase in supply.
- S - Subsidies: Government subsidies encourage greater supply, moving the curve outward.
- W - Weather: Favorable conditions, particularly in agriculture, enhance supply.
- C - Costs of Production: A decrease in production costs allows firms to supply more; increases in costs may trigger an inward supply shift.
- Exchange Rate Depreciation: Can raise the cost of imports, leading to an inward shift in supply due to increased expenses.
Price Elasticity of Supply (PES)
- Price elasticity of supply measures how responsive the quantity supplied is to a change in price.
- Formula for calculating PES is not provided but typically represented as the percentage change in quantity supplied divided by the percentage change in price.
Elastic Supply
- Elastic supply occurs when firms can quickly and cheaply increase production in response to price changes.
- Numerical value of PES for elastic supply is greater than 1 (PES > 1).
Inelastic Supply
- Inelastic supply indicates that an increase in quantity supplied is costly and time-consuming for firms.
- PES value for inelastic supply is less than 1 (PES < 1).
Implications
- Understanding PES is crucial for firms to make informed pricing and production decisions in reaction to market changes.
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