Supply 1

Supply

It’s Just Like Demand, but Different

Changing Roles

• Remember today we are talking about supply (and not demand). So you need to think about things as if you were a business trying to make the most money possible.

• You are NOT a consumer trying to save money.

• PROFIT! PROFIT! PROFIT! PROFIT!

What is Supply?

• Supply is how much a firm is willing and able 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.

Supply Schedules and Curves

• 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 CDsSupplied per month

Supply Schedule

P ($) Qs per month

$20 15

Supply Schedule

P ($) Qs per month

$20 15

$15 7

Supply Schedule

P ($) Qs per month

$20 15

$15 7

$10 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

Supply Curve

P($)

Qs per month

Remember to ALWAYS labelyour axes!

Supply Curve

P($)

Qs per month

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10

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0 5 10 15

Supply Curve

P($)

Qs per month

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0 5 10 15

A

Supply Curve

P($)

Qs per month

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0 5 10 15

A

B

Supply Curve

P($)

Qs per month

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0 5 10 15

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C

Supply Curve

Qs per month

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C

P($) S

Market Supply Curve

• Just like it was for Demand, adding “Market” to the front simply means we are now talking about all firms in the market

• So, a Market Supply Schedule and a Market Supply Curve would be what?

Market 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 Qs

• Change in Supply - a shift of the supply curve

• Change in Quantity Supplied (DQs) - movement along a supply curve• A change in quantity supplied can only be

caused by a change in the price of the good

Increase in Supply

Increase in Supply

P

Qs

Increase in Supply

P

Qs

S

Increase in Supply

P

Qs

S

Increase in Supply

P

Qs

SS’

Increase in Qs

Increase in Qs

P($)

Qs per month

Increase in Qs

P($)

Qs per month

S

Increase in Qs

P($)

Qs per month

A

S

Increase in Qs

P($)

Qs per month

A

S

Increase in Qs

P($)

Qs per month

A

B

S

Changes in Supply

• Just like for demand there are a list of the “Determinants of Supply”

• These are the things that will cause a change in Supply.

Changes in Supply

Price of Relevant Resources• If the cost of the resources used to make a

product change in price. Then supply will change.

• Let’s say the cost of plastic (used in making CDs) decreases. What will happen to the supply of CDs?

• CD Supply will go up, because it is now cheaper to make CD’s at every price.

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($)

Qs per month

5

10

15

20

0 5 10 15

A

A’

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($)

Qs per month

5

10

15

20

0 5 10 15

A

A’

Old Supply Curve

New Supply Curve

Price of Relevant Resources

• Obviously the reverse is also true. • In increase in the cost of plastic (used in

making CDs, makes it more expensive to make every quantity of CDs

Resource Price Increase

• 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($)

Qs per month

5

10

15

20

0 5 10 15

B

B’

Resource Price Increase

• 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($)

Qs per month

5

10

15

20

0 5 10 15

B

B’ Old Supply Curve

New Supply Curve

Changes in Supply

Technology• Similarly changes in technology can change

supply• Improvement in technology lowers costs

• Lower cost of production increases Supply

• Worsening of technology increases costs• Higher cost of production decreases Supply

Changes in 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

Changes in Supply

Expectations of Future Prices • Similarly to demand, what firms think will happen

to prices in the future will effect supply now.• If Firms expect price of their good to decrease in

the future what will happen?• Supply increases today• Firm would prefer to sell today when price is higher• Remember, they want to make as much money as they

can.

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

Changes in Supply

Taxes• Changes in tax rates can also affect supply• An Increase in tax on the good decreases

supply. Why?• Raises the cost of production

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

Changes in Supply

Subsidies• A subsidy is an amount the paid to the producer

for each unit of a good produced• Adding or removing subsidies changes supply.• Increase in subsidy on a good increases supply.

Why?• Lowers the costs of production

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

Changes in Supply

Availability of Credit • How easy it is to borrow money affects supply.• If interest rates are low, then it is easier for the

firm to borrow money and thus supply will do what?– Supply increases

• If interest rates are high, it is more difficult for the firm to borrow money and thus supply does what?– Supply decreases

Elasticity of Supply

• Is a measure of how Suppliers will respond to changes in the market.

• Operates exactly like Elasticity of Demand– Inelastic - price changes have little of no effect

on supply– Elastic – price changes have dramatic effect of

supply

• Just like with Demand, Time changes most things to elastic

Increase in Supply

Increase in Supply

P

Qs

Increase in Supply

P

Qs

S

Increase in Supply

P

Qs

S

Increase in Supply

P

Qs

SS’

Increase in Qs

Increase in Qs

P($)

Qs per month

Increase in Qs

P($)

Qs per month

S

Increase in Qs

P($)

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S

Increase in Qs

P($)

Qs per month

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S

Increase in Qs

P($)

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S