Market Economy MCQ 3 (Supply)

The Law of Supply

• The law of supply states that when the price of a good/service rises, the quantity supplied will also rise, and when the price falls, the quantity supplied will fall.
• There is a positive relationship between the price and quantity supplied.

Exceptions to the Law of Supply

• Movements and shifts in supply occur due to various factors.

Individual and Market Supply

• Individual supply refers to the quantity of a good/service supplied by individual suppliers at different prices.
• Market supply refers to the aggregate quantity supplied of a good/service by all suppliers in a market at different prices.

Factors that Cause a Shift in Supply

• Change in the cost of production: a rise in costs leads to less production with a given amount of money, while a fall in costs leads to more production with a given amount of money.
• Price of related goods/services: a change in the price of related goods/services can affect the supply of a good/service, as suppliers may allocate resources to more profitable products.
• Unplanned factors: positive and negative factors, such as weather, can affect the supply of agricultural products.
• Government/EU subsidies: an increase in subsidies leads to an increase in supply, as it incentivizes producers to increase output.
• Number of sellers: a change in the number of sellers affects the supply of a good/service, with more sellers leading to an increase in supply and fewer sellers leading to a decrease.
• Advances in technology: increases in technology can lead to increases in supply, regardless of the price, as the cost of production may be lower.

Movement and Shift

• Movement refers to a change in quantity supplied in response to a change in the price of the good itself.
• Shift refers to a change in supply at any given price, caused by factors other than a change in the price of the good.
• Supply can be fixed, such as a concert venue with a fixed number of seats, making it perfectly inelastic.
• In situations where supply is fixed, the supplier may be able to initially increase the quantity supplied in response to a price rise, but will eventually be limited by capacity.

Understand the Law of Supply, its relationship with price, and the exceptions. Learn about individual and market supply, movements, and shifts.