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Chapter 2SupplyP42-45
Chapter 2SupplyP42-45
SUPPLYSUPPLY
• The relationship between supply The relationship between supply and priceand price
• The supply curveThe supply curve
The supply curve:The supply curve:The supply of The supply of potatoespotatoes (monthly) (monthly)
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0 100 200 300 400 500 600 700 800
Pri
ce (
pen
ce p
er k
g)
Quantity (tonnes: 000s)
Supply
a
P
4
Q
100a
Market supply of potatoes Market supply of potatoes (monthly)(monthly)
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ce (
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Supply
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P
4 8
Q
100200
ab
Market supply of potatoes Market supply of potatoes (monthly)(monthly)
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0 100 200 300 400 500 600 700 800
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Supply
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P
4 812
Q
100200350
abc
Market supply of potatoes Market supply of potatoes (monthly)(monthly)
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0 100 200 300 400 500 600 700 800
Pri
ce (
pen
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Quantity (tonnes: 000s)
Supply
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b
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d P
4 81216
Q
100200350530
abcd
Market supply of potatoes Market supply of potatoes (monthly)(monthly)
Pri
ce (
pen
ce p
er k
g)
Quantity (tonnes: 000s)
Supply
a
b
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d
e
P
4 8121620
Q
100200350530700
abcde
Market supply of potatoes Market supply of potatoes (monthly)(monthly)
0
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0 100 200 300 400 500 600 700 800
0
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0 100 200 300 400 500 600 700 800
Pri
ce (
pen
ce p
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g)
Quantity (tonnes: 000s)
Supply
a
b
c
d
e
P
4 8121620
Q
100200350530700
abcde
Market supply of potatoes Market supply of potatoes (monthly)(monthly)
0
4
8
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16
20
0 100 200 300 400 500 600 700 800
Pri
ce (
pen
ce p
er k
g)
Quantity (tonnes: 000s)
Supply
a
b
c
d
e
P
4 8121620
Q
100200350530700
abcde
Supply Curve Slopes
Upwards
The supply curveThe supply curve
• Why did we draw this as upward sloping?Why did we draw this as upward sloping?
– supply curves generally slope upwards since supply curves generally slope upwards since as a general rule producers are willing to as a general rule producers are willing to supply more as price people are preparedy to supply more as price people are preparedy to pay risespay rises
• Thus, the Quantity Supplied rises as the Thus, the Quantity Supplied rises as the Price risesPrice rises
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0 100 200 300 400 500 600 700 800
Pri
ce (
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ce p
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g)
Quantity (tonnes: 000s)
Supply
a
b
c
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e
P
4 8121620
Q
100200350530700
abcde
P Up
QS Up
Supply
Supply CurveSupply Curve
• Quantity Supplied rises as Prices rises so Quantity Supplied rises as Prices rises so Change in Quantity is Change in Quantity is PositivePositive when when Change in Price is Change in Price is PositivePositive
• Thus:Thus:
– we say that Supply is a Positive Function we say that Supply is a Positive Function of Priceof Price
•
• QQSS=f(P)=f(P)
• Means Supply Curve slopes UpMeans Supply Curve slopes Up
SUPPLYSUPPLY
• SO:SO:• The supply curve slopes upwards The supply curve slopes upwards Ceteris Ceteris
ParibusParibus
• So What is being held constant here?So What is being held constant here?
SUPPLYSUPPLY
• Other determinants of supply Other determinants of supply –Price of inputs / costs of productionPrice of inputs / costs of production–Capital (K ) price: rCapital (K ) price: r–Labour (L) price: wLabour (L) price: w
–Raw Materials (Oil, Materials Etc) PRaw Materials (Oil, Materials Etc) Pmm
• So QSo QSS=f(P) can be generalised to =f(P) can be generalised to
• QQSS=f(P, =f(P, r,w, Pr,w, Pm m ,…….,……. ) )
EVEN MOREEVEN MORE Determinants of Supply Determinants of Supply
• PricePrice• Price of Inputs Price of Inputs • TechnologyTechnology• Profitably of Alternative ProductsProfitably of Alternative Products
– Price of good x rises, switch from Price of good x rises, switch from supplying good ysupplying good y
• Profitably of goods in joint supplyProfitably of goods in joint supply– Steaks and Cheap Cuts of Mince and Steaks and Cheap Cuts of Mince and
OffalOffal
• Strikes, Nature, Random ShocksStrikes, Nature, Random Shocks
SUPPLYSUPPLY
• QQSS=f(=f(PP, , r,w, Pr,w, Pm m ,…….,……. ) )
• Note: when we drew the diagram we Note: when we drew the diagram we graphed Qgraphed QS S against P. Soagainst P. So PP is the is the ENDOGENOUSENDOGENOUS variable. variable.
• r,w,Pr,w,Pmm are not explicitly in the diagram so are not explicitly in the diagram so they are the they are the EXOGENOUS EXOGENOUS variablesvariables..
SUPPLYSUPPLY
• Movements along and shifts in the supply Movements along and shifts in the supply curvecurve
• Again a change in Price (Again a change in Price (the endogenous the endogenous variable)variable) causes movements along the causes movements along the demand curvedemand curve
• QQSS=f(=f(PP, , r,w, Pr,w, Pm m ,……. ),……. )
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Pri
ce (
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Quantity (tonnes: 000s)
Supply
a
b
c
d
eMovement Along the Supply CurveMovement Along the Supply Curve
Shifts in SUPPLYShifts in SUPPLY
• A change in an A change in an ExogenousExogenous variable causes variable causes shifts in the supply curveshifts in the supply curve
• QQSS=f(=f(P,P, r,w, Pr,w, Pm m ,…….,……. ) )
P
QO
S0=f(P)
Shifts in the supply curveShifts in the supply curve
P
QO
S0 S1
Increase
Shifts in the supply curve: An improvement in Shifts in the supply curve: An improvement in TechnologyTechnology
P
QO
S2 S0
Decrease
Shifts in the supply curve: PShifts in the supply curve: Pmm goes up, e.g. Oil goes up, e.g. Oil
P
QO
S2 S0 S1
Tech. ImprovesIncrease
Oil Price UPDecrease
Shifts in the supply curveShifts in the supply curve
• So now have drawn a demand curveSo now have drawn a demand curve
• And a supply curveAnd a supply curve
• Where do we go from here?Where do we go from here?
• We use the information we have to We use the information we have to determine the determine the priceprice that obtains in the that obtains in the marketmarket and hence the and hence the quantity demanded quantity demanded and suppliedand supplied
