Cambridge International as and a level Economics Ebook

Supply curve: 
represents the relationship between the 
quantity supplied and the price of the product.
KEY TERM
43
Chapter 2: The price system and the microeconomy 

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This growth may well attract new entrants, the competition 
will increase and prices may fall resulting in some firms 
leaving the industry altogether. In some industries supply 
could be deliberately restricted to keep up prices.
■ 
Change in price of other products: Most firms need to be 
continuously aware of competitors. So, if a competitor 
lowers its price, it could mean that less will be supplied by 
other firms who keep their price unchanged. Alternatively, 
if a competitor increases its price, other firms may gain and 
will be able to supply more provided they can keep their 
costs under control.
■ 
Government policy: Governments influence companies 
and their supply of products in many ways. A new tax on a 
product will result in a reduction in supply; a 
subsidy
will 
usually result in an increase in supply.
■ 
Other factors: In agricultural markets, supply is invariably 
aff ected by uncertain weather conditions. Storms or frost 
may aff ect the supply of coff ee or grapes; drought aff ects 
cereal crop yields whereas good weather can lead to 
bumper harvests of corn and wheat.
Th
e factors aff ecting supply are many. Th
eir particular 
signifi cance depends on each industry or service.
Subsidy: 
a payment made by government to producers to 
reduce the market price.
KEY TERM
The concept of elasticity
In the analysis of demand and supply so far, the focus 
has been on understanding the general direction of any 
change in price and its eff ect on the quantity demanded or 
supplied. To add greater meaning to this explanation, it is 
necessary to look at the
 extent
of any change in price and 
its eff ect on the quantity demanded and supplied.
A few simple examples will show why this is necessary. 
For some products – e.g., rice – a small change in price 
is likely to have only a modest impact on the quantity 
demanded. For other food products, particularly where 
there are close substitutes, for example diff erent brands of 
tea, a small change in price may have a much larger eff ect 
on the quantity demanded. Similarly, if there is a change in 
income, there may be little eff ect on the demand for some 
products and a much greater eff ect on demand for others. 
For example, an increase in income may lead to an increase 
in demand for restaurant meals yet result in little or no 
change in demand for eating at local cafés or street stalls.
Th
e concept that explains these variations is referred 
to in Economics as