supply

SupplySupply

OutlineOutline

I. Law of SupplyI. Law of Supply

II. Supply Schedules and Supply II. Supply Schedules and Supply CurvesCurvesA. Supply SchedulesA. Supply Schedules

B. Supply CurvesB. Supply Curves

C. Market SupplyC. Market Supply

Outline (Cont.)Outline (Cont.)

III. Change in Supply vs. Change in III. Change in Supply vs. Change in Quantity SuppliedQuantity SuppliedA. Change in SupplyA. Change in Supply

B. Change in Quantity SuppliedB. Change in Quantity Supplied

What is Supply?What is Supply?

Supply is how much a firm is willing Supply is how much a firm is willing to sell at every given price, ceteris to sell at every given price, ceteris paribusparibus

Thus, if all else remains the same Thus, if all else remains the same and the price of a good goes up, and the price of a good goes up, what would you expect the response what would you expect the response of a firm to be?of a firm to be?– To produce more, since prices are going To produce more, since prices are going

up, so will profitsup, so will profits

Law of SupplyLaw of Supply

Law of SupplyLaw of Supply - the price of a product - the price of a product (or service) is directly related to the (or service) is directly related to the quantity supplied, ceteris paribus.quantity supplied, ceteris paribus.

Quantity SuppliedQuantity Supplied - the amount of a - the amount of a good (or service) produced by firms at good (or service) produced by firms at a particular price.a particular price.

While demand typically refers to While demand typically refers to consumers, supply typically refers to consumers, supply typically refers to firms.firms.

Supply Schedules and CurvesSupply Schedules and Curves

Just like we were able to construct Just like we were able to construct a Demand Schedule and Demand a Demand Schedule and Demand Curve, we will do the same for Curve, we will do the same for SupplySupply

Supply ScheduleSupply Schedule - a table showing - a table showing the relationship between the price the relationship between the price of a good and the quantity supplied of a good and the quantity supplied per period of time, ceteris paribus.per period of time, ceteris paribus.

Supply ScheduleSupply Schedule

Price of CDs ($) Quantity of CDsSupplied per month

Supply ScheduleSupply Schedule

P ($) Qs per month

$20 15

Supply ScheduleSupply Schedule

P ($) Qs per month

$20 15

$15 7

Supply ScheduleSupply Schedule

P ($) Qs per month

$20 15

$15 7

$10 5

Supply Schedules and Supply Schedules and CurvesCurves

Supply CurveSupply Curve - a diagram showing - a diagram showing the relationship between the price the relationship between the price of a good and the quantity of a good and the quantity supplied per period of time, ceteris supplied per period of time, ceteris paribus.paribus.

Supply CurveSupply Curve

Supply CurveSupply Curve

P($)

Qs per month

Remember to ALWAYS labelyour axes!

Supply CurveSupply Curve

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Supply CurveSupply Curve

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Supply CurveSupply Curve

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Supply CurveSupply Curve

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Supply CurveSupply Curve

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P($) S

Market Supply CurveMarket Supply Curve

Market Supply CurveMarket Supply Curve - a curve - a curve showing the relationship between the showing the relationship between the price of a good and the total quantity price of a good and the total quantity supplied by all firms in the market per supplied by all firms in the market per period of time, ceteris paribus.period of time, ceteris paribus.

Market supply curves are obtained by Market supply curves are obtained by summing the supply curves of summing the supply curves of individual firms.individual firms.

Market Supply ScheduleMarket Supply Schedule

Market Supply ScheduleMarket Supply Schedule - a table - a table showing the relationship between the showing the relationship between the price of a good and the total quantity price of a good and the total quantity supplied by all firms in the market supplied by all firms in the market per period of time, ceteris paribus.per period of time, ceteris paribus.

Market supply schedules are Market supply schedules are obtained by summing the supply obtained by summing the supply curves of individual firms.curves of individual firms.

Market Supply ScheduleMarket Supply Schedule

P($) Firm AQs

Firm BQs

Firm CQs

MarketQs

5 1 3 4 8

10 2 8 5 15

15 3 12 7 22

Change in S vs. Change in Change in S vs. Change in QQss

Change in SupplyChange in Supply - a shift of the - a shift of the supply curvesupply curve

A supply curve is drawn under the A supply curve is drawn under the assumption of ceteris paribus.assumption of ceteris paribus.• When this assumption is relaxed, the When this assumption is relaxed, the

entire supply curves shiftsentire supply curves shifts

Change in S vs. Change in Change in S vs. Change in QQss

Changes in SupplyChanges in Supply• Increase in supply - supply curve Increase in supply - supply curve

shifts to the rightshifts to the right• Decrease in supply - supply curve Decrease in supply - supply curve

shifts to the leftshifts to the left

Change in SupplyChange in Supply

Factors Which Cause a Change in Factors Which Cause a Change in SupplySupply

Prices of Relevant ResourcesPrices of Relevant Resources TechnologyTechnology Number of SellersNumber of Sellers Expectations of Future PriceExpectations of Future Price Taxes and SubsidiesTaxes and Subsidies Changes in the Availability of CreditChanges in the Availability of Credit

Price of Relevant ResourcesPrice of Relevant Resources

Let’s say the cost of plastic (used Let’s say the cost of plastic (used in making CDs) decreasesin making CDs) decreases

It is now cheaper to make every It is now cheaper to make every quantity of CDsquantity of CDs

Resource Price DecreaseResource Price Decrease

So, before the cost decrease, at a So, before the cost decrease, at a price of $20 the firm was willing to price of $20 the firm was willing to make 15 CDs. If costs go down, will make 15 CDs. If costs go down, will the firm still need $20 to make them the firm still need $20 to make them want to supply 15 CDs?want to supply 15 CDs?– No, in order to make the same profit No, in order to make the same profit

they are willing to take a lower price they are willing to take a lower price

Supply CurveSupply Curve

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Resource Price DecreaseResource Price Decrease

Thus the firm is willing to supply Thus the firm is willing to supply every quantity at a lower price.every quantity at a lower price.

Or in other words, at every price the Or in other words, at every price the firm is willing to supply more of the firm is willing to supply more of the goodgood

In summary, if the price of a resource In summary, if the price of a resource goes down, supply increases (shifts goes down, supply increases (shifts to the right)to the right)

Supply Curve ShiftSupply Curve Shift

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Old Supply Curve

New Supply Curve

Price of Relevant ResourcesPrice of Relevant Resources

Let’s say the cost of plastic (used Let’s say the cost of plastic (used in making CDs) increasesin making CDs) increases

It is now more expensive to make It is now more expensive to make every quantity of CDsevery quantity of CDs

Resource Price DecreaseResource Price Decrease

So, before the cost increase, at a So, before the cost increase, at a price of $15 the firm was willing to price of $15 the firm was willing to make 7 CDs. If costs go up, will the make 7 CDs. If costs go up, will the firm still need $15 to make them firm still need $15 to make them want to supply 7 CDs?want to supply 7 CDs?– No, in order to make the same profit No, in order to make the same profit

they are going to need a higher price to they are going to need a higher price to cover the higher costs cover the higher costs

Supply CurveSupply Curve

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Resource Price DecreaseResource Price Decrease

Thus the firm is willing to supply Thus the firm is willing to supply every quantity at a higher price.every quantity at a higher price.

Or in other words, at every price the Or in other words, at every price the firm is willing to supply less of the firm is willing to supply less of the goodgood

In summary, if the price of a resource In summary, if the price of a resource goes up, supply decreases (shifts to goes up, supply decreases (shifts to the left)the left)

Supply Curve ShiftSupply Curve Shift

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B’ Old Supply Curve

New Supply Curve

TechnologyTechnology

Improvement in technology lowers Improvement in technology lowers costscosts• Lower cost of production increases Lower cost of production increases

SupplySupply Worsening of technology increases Worsening of technology increases

costscosts• Higher cost of production decreases Higher cost of production decreases

SupplySupply

Number of SellersNumber of Sellers

More sellers in the market means More sellers in the market means more quantity is being supplied at more quantity is being supplied at every priceevery price• Increase in supply of the goodIncrease in supply of the good

Less sellers in the market means less Less sellers in the market means less quantity is being supplied at every quantity is being supplied at every priceprice• Decrease supply of the goodDecrease supply of the good

Expectations of Future Expectations of Future PricesPrices

Firms expect price of their good to Firms expect price of their good to decrease in the futuredecrease in the future• Supply increases todaySupply increases today• Firm would prefer to sell today when Firm would prefer to sell today when

price is higherprice is higher

Expectations of Future Expectations of Future PricesPrices

Firms expect price of their good to Firms expect price of their good to increase in the futureincrease in the future• Supply decreases todaySupply decreases today• Firm would prefer to wait until the Firm would prefer to wait until the

good can be sold for a higher pricegood can be sold for a higher price

Taxes and SubsidiesTaxes and Subsidies

Increase in tax on the good Increase in tax on the good decreases supplydecreases supply• Raises the cost of productionRaises the cost of production

Decrease in tax on the good Decrease in tax on the good increases supplyincreases supply• Lowers the cost of productionLowers the cost of production

Taxes and SubsidiesTaxes and Subsidies

A subsidy is an amount the paid to the A subsidy is an amount the paid to the producer for each unit of a good producer for each unit of a good producedproduced

Increase in Subsidy on the Good Increase in Subsidy on the Good Increases SupplyIncreases Supply• Lowers the costs of productionLowers the costs of production

Decrease in Subsidy on the Good Decrease in Subsidy on the Good Decreases SupplyDecreases Supply• Raises the costs of productionRaises the costs of production

Availability of CreditAvailability of Credit

If it is easier for the firm to borrow If it is easier for the firm to borrow money, the firm will be able to money, the firm will be able to produce moreproduce more– Thus Supply increasesThus Supply increases

If it is more difficult for the firm to If it is more difficult for the firm to borrow money, the firm will have to borrow money, the firm will have to produce lessproduce less– Thus Supply decreasesThus Supply decreases

Change in Quantity SuppliedChange in Quantity Supplied

Change in Quantity SuppliedChange in Quantity Supplied ( (QQss) - ) - movement along a supply curvemovement along a supply curve• A change in quantity supplied can A change in quantity supplied can onlyonly be be

caused by a change in the price of the good.caused by a change in the price of the good. Changes in Quantity SuppliedChanges in Quantity Supplied

• Increase in QIncrease in Qss - a movement to the right - a movement to the right along a supply curvealong a supply curve

• Decrease in QDecrease in Qss - a movement to the left - a movement to the left along a supply curvealong a supply curve

Increase in SupplyIncrease in Supply

Increase in SupplyIncrease in Supply

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Increase in SupplyIncrease in Supply

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Increase in SupplyIncrease in Supply

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Increase in SupplyIncrease in Supply

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Increase in QIncrease in Qss

Increase in QIncrease in Qss

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Increase in QIncrease in Qss

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Increase in QIncrease in Qss

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