determinants of supply aims: the nature of supply the relationship between price and supply market...
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Determinants of Supply
Aims:The nature of supplyThe relationship between price and supplyMarket supplyCauses of shifts in the supply curve
The Law of Supply
Supply is the quantity of a good or service that a producer is willing and able to supply onto the market at a given price in a given time period
The basic law of supply is that as the market price of a commodity rises, so producers expand their supply onto the market
A supply curve shows a relationship between price and quantity a firm is willing and able to sell
The Supply CurvePrice
Quantity
Supply
P1
Q1
P2
Q2Q3
P3
An increase in price will cause an
EXPANSION in Supply.
A fall in price will cause a
CONTRACTION in Supply.
Explaining the supply decision
The “quantity supplied” is the amount sellers are willing and able to offer for sale at a single price
The change in the price of the good itself causes a movement ALONG the supply curve
Supply curves normally slope upward. Why?
Rising prices act as an incentive for producers to expand output – potential for higher profits
Increased output may lead to higher costs of production
But not all economists accept this convention (A2 theory)
Increased output might lead to lower costs per unit (known as economies of scale)
An outward shift in the Supply CurvePrice
Quantity
S1
P1
Q1 Q2
S2
An inward shift in the Supply CurvePrice
Quantity
S1
P1
Q1 Q2
S2
S3
Q3
Causes of shifts in market supply Changes in production costs
Wages,raw materials and components, energy, rents, interest rates
Government taxes and subsidies
Changes in technology – ICT can reduce long term costs but are expensive in SR
Changes in the number of producers in the market
Expectation of future price changes
Climatic conditions (important mainly for agricultural supply)
Shifts in the Supply curve…
What would cause the supply of butter to rise?
Reduction in costs of producing – e.g. nitrogen fertiliser = more used by farmers = better grass = more milk
Better technology in producing butter
More govt subsidies to farmers
Increase in profitability of skimmed milk ….. Because butter and
cream products are jointly produced with skimmed milk.
Weather conditions favourable for favourable grass yield.Pause for mini exercise – cut out strips for you to select!
More examples of shifts in supply – Mini exercise 1 What reasons might be given for the supply of potatoes to fall?
For what reasons might the supply of leather rise?
What reasons might be given for the supply of cod to fall?
For what reasons might the number of plumbers grow?
What reasons might be given for the number of teachers to fall?
What reasons might there be for the number of new houses being built rise?
The Supply Curve
0
10
20
30
40
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90
100
0 20 40 60 80 100 120 140
Quantity (000 units per month)
Pric
e £
Price
Quantity Supplied (Qs)
Supply (S)
P1
The supply curve shows the
quantity of a product that a
supplier is willing and able to sell at a given price in a given time
period
There is usually a positive
relationship between price and quantity
supplied
The Supply Curve
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20
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90
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0 20 40 60 80 100 120 140
Quantity (000 units per month)
Pric
e £
Price
Quantity Supplied (Qs)
S1
P1
An increase in market price
causes an expansion of
quantity supplied as producers
respond to the incentive of
higher prices and higher potential profits.
P2
An expansion of supply
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0 20 40 60 80 100 120 140
Quantity (000 units per month)
Pric
e £
The Supply CurvePrice
Quantity Supplied (Qs)
S1
P1
A lower market
price will lead to a
contraction in total output
P2
A contraction of supply
An Outward Shift in the Supply Curve
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0 20 40 60 80 100 120 140
Quantity (000 units per month)
Pric
e £
Price
Quantity Supplied (Qs)
S1
P1
Shifts in the supply curve mean that more or less will be supplied onto the market
at each price levelS2
An Inward Shift in the Supply Curve
0
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20
30
40
50
60
70
80
90
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0 20 40 60 80 100 120 140
Quantity (000 units per month)
Pric
e £
Price
Quantity Supplied (Qs)
S1
P1
A fall in supply means that less is supplied onto the market at
each price
S3
Your Go
Remember that PRICE = contraction or expansion
All other factors = SHIFT inwards or outwards…
So get your whiteboards ready….
Write on one side
MOVEMENT ALONG
On the other
SHIFT
Mini exercise 2….
New oil fields starts up in production
The demand for central heating rises
The price of gas falls
Oil companies anticipate a surge in demand for central heating oil
The demand for petrol rises
New technology decreases the cost of oil refining
All oil products become more expensive.
In each case BE PREPARED TO EXPLAIN
• Whether THE move along the supply curve is a contraction or expansion
•Or whether THE shift in the supply curve is to the left or right
Supply images
…. The milk market!
The supply of milk
The milk supply chain
Factors affecting the market supply of milk The price of raw milk from farmers
Productivity in milk industry
The number of suppliers in the industry
Costs of packaging and transportation
Government subsidies to milk producers
Joint Supply Two products are in joint supply when a rise in the output
of one product leads to a rise in the supply of the other product
Can ewe think of
examples of joint supply?
Diagram to show joint supply
Price Price
Quantity bought and sold Quantity bought and sold
D
S Beef
P1
Q1
D
S Beef hide
D1
P2
P3
Qa
S1
Qc
P4
QbQ2
Two products are in joint supply when a rise in the output of one product leads to a rise in the supply of the other product