Supply

I. Law of Supply Outline II. Supply Schedules and Supply Curves A. Supply Schedules B. Supply Curves C. Market Supply

Outline (Cont.) III. Change in Supply vs. Change in Quantity Supplied A. Change in Supply B. Change in Quantity Supplied

What is Supply?

 Supply is how much a firm is willing to sell at every given price, ceteris paribus  Thus, if all else remains the same and the price of a good goes up, what would you expect the response of a firm to be?

– To produce more, since prices are going up, so will profits

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

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

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

Supply Schedules and Curves  Just like we were able to construct a Demand Schedule and Demand Curve, we will do the same for Supply  Supply Schedule - a table showing the relationship between the price of a good and the quantity supplied per period of time, ceteris paribus.

Supply Schedule Price of CDs ($) Quantity of CDs Supplied per month

P ($) $20 Supply Schedule Q s per month 15

P ($) $20 $15 Supply Schedule Q s per month 15 7

P ($) $20 $15 $10 Supply Schedule Q s per month 15 7 5

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

Supply Curve

P($) Supply Curve Remember to ALWAYS label your axes!

Q s per month

Supply Curve P($) 20 15 10 5 0 5 10 15 Q s per month

Supply Curve P($) 20 15 10 5 0 5 10 A 15 Q s per month

P($) 20 15 10 5 0 B Supply Curve A 5 10 15 Q s per month

Supply Curve P($) 20 15 10 5 0 C 5 B 10 A 15 Q s per month

P($) 20 15 10 5 0 C 5 B Supply Curve A S 10 15 Q s per month

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

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

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

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

Market Supply Schedule P($) 5 10 15 Firm A Q s 1 Firm B Q s 3 Firm C Q s 4 Market Q s 8 2 8 5 15 3 12 7 22

Change in S vs. Change in Q s  Change in Supply - a shift of the supply curve  Changes in Supply • Increase in supply - supply curve shifts to the right • Decrease in supply - supply curve shifts to the left

Change in Supply Factors Which Cause a Change in Supply  Prices of Relevant Resources  Technology  Number of Sellers  Expectations of Future Price  Taxes and Subsidies  Changes in the Availability of Credit

Price of Relevant Resources  Let’s say the cost of plastic (used in making CDs) decreases  It is now cheaper to make every quantity of CDs

Resource Price Decrease  So, before the cost decrease, at a price of $20 the firm was willing to make 15 CDs. If costs go down, will the firm still need $20 to make them want to supply 15 CDs?

– No, in order to make the same profit they are willing to take a lower price

Supply Curve P($) 20 15 10 5 0 5 10 A A’ 15 Q s per month

Resource Price Decrease  Thus the firm is willing to supply every quantity at a lower price.

 Or in other words, at every price the firm is willing to supply more of the good  In summary, if the price of a resource goes down, supply increases (shifts to the right)

Supply Curve Shift P($) 20 15 10 5 0 5 10 Old Supply Curve A A’ New Supply Curve 15 Q s per month

Price of Relevant Resources  Let’s say the cost of plastic (used in making CDs) increases  It is now more expensive to make every quantity of CDs

Resource Price Decrease  So, before the cost increase, at a price of $15 the firm was willing to make 7 CDs. If costs go up, will the firm still need $15 to make them want to supply 7 CDs?

– No, in order to make the same profit they are going to need a higher price to cover the higher costs

Supply Curve P($) 20 15 10 5 0 B’ B 5 10 15 Q s per month

Resource Price Decrease  Thus the firm is willing to supply every quantity at a higher price.

 Or in other words, at every price the firm is willing to supply less of the good  In summary, if the price of a resource goes up, supply decreases (shifts to the left)

Supply Curve Shift P($) 20 New Supply Curve B’ B 15 Old Supply Curve 10 5 0 5 10 15 Q s per month

Technology  Improvement in technology lowers costs • Lower cost of production increases Supply  Worsening of technology increases costs • Higher cost of production decreases Supply

Number of Sellers  More sellers in the market means more quantity is being supplied at every price • Increase in supply of the good  Less sellers in the market means less quantity is being supplied at every price • Decrease supply of the good

Expectations of Future Prices  Firms expect price of their good to decrease in the future • Supply increases today • Firm would prefer to sell today when price is higher

Expectations of Future Prices  Firms expect price of their good to increase in the future • Supply decreases today • Firm would prefer to wait until the good can be sold for a higher price

Taxes and Subsidies  Increase in tax on the good decreases supply • Raises the cost of production  Decrease in tax on the good increases supply • Lowers the cost of production

Taxes and Subsidies  A subsidy is an amount the paid to the producer for each unit of a good produced  Increase in Subsidy on the Good Increases Supply • Lowers the costs of production  Decrease in Subsidy on the Good Decreases Supply • Raises the costs of production

Availability of Credit  If it is easier for the firm to borrow money, the firm will be able to produce more – Thus Supply increases  If it is more difficult for the firm to borrow money, the firm will have to produce less – Thus Supply decreases

Change in Quantity Supplied  Change in Quantity Supplied ( D Q s ) movement along a supply curve • A change in quantity supplied can only be caused by a change in the price of the good.

 Changes in Quantity Supplied • Increase in Q s - a movement to the right along a supply curve • Decrease in Q a supply curve s - a movement to the left along

Increase in Supply

P Increase in Supply Q s

P Increase in Supply S Q s

P Increase in Supply S Q s

P Increase in Supply S S’ Q s

Increase in Q s

P($) Increase in Q s Q s per month

P($) Increase in Q s S Q s per month

P($) Increase in Q s S A Q s per month

P($) Increase in Q s S A Q s per month

P($) Increase in Q s S B A Q s per month