Supply slide 1

MODEL OF SUPPLYThe model of supply is an attempt to explain the

amount supplied of any good or service.

SUPPLY DEFINED

The amount of a good or service a firm wants to sell, and is able to sell per unit time.

Supply slide 2

THE “STANDARD” MODEL OF SUPPLY

The DEPENDENT variable is the amount supplied.

The INDEPENDENT variables are:the good’s own price

the prices of inputs used in its production

the technology of production

expectations

taxes and subsidies

Supply slide 3

YOU COULD WRITE THE MODEL THIS WAY:

The supply of lemon-lime:

QS(lemon-lime) = S(Plemon-lime, Pcitric acid,

Pcarbon dioxide, Plabor, . . . ,technology,

expectations, taxes & subsidies)

Supply slide 4

THE SUPPLY CURVE

The supply curve for any good shows the quantity supplied at each price, holding constant all other determinants of supply.

The DEPENDENT variable is the quantity supplied.

The INDEPENDENT variable is the good’s own price.

Supply slide 5

THE LAW OF SUPPLY

The Law of Supply says that an increase in a good’s own price will result in an increase in the amount supplied, holding constant all the other determinants of supply.

The Law of Supply says that supply curves are positively sloped.

Supply slide 6

A SUPPLY CURVE

A supply curve must look like this, i.e., be positively sloped.

own price

quantity supplied

supply

Market for lemon-lime

Supply slide 7

The supply curve means:

You pick a price, such a p0, and the supply curve shows how much is supplied.

own price

quantity supplied

supply

p0

Q0

Market for lemon-lime

Supply slide 8

own price

quantity supplied

supply

p0

Q0

Market for lemon-lime

If the price of lemon-lime rises, how is the supply curve

affected?

Go to hidden slide

Supply slide 10

AN IMPORTANT POINT

When drawing a supply curve notice that the axes are reversed from the usual convention of putting the dependent (y) variable on the vertical axis, and the independent (x) variable on the horizontal axis.

Supply slide 11

ECONOMISTS HAVE HYPOTHESES ABOUT HOW CHANGES IN EACH OF THE INDEPENDENT VARIABLES

AFFECTS THE AMOUNT SUPPLIED

Supply slide 12

Other factors affecting supply

The question here is how to show the effects of changes in input prices, technology, expectations, and taxes.

The answer, of course, is that changes in input prices, technology, expectations, or taxes cause the supply curve to shift.

Supply slide 13

Changes in input prices

Consider the supply of lemon-lime, and suppose the price of citric acid, a crucial input to lemon-lime, falls. Lemon-lime firms now find that lemon-lime production is more profitable than it was before, and they respond to this be increasing the supply of lemon-lime.

Supply slide 14

The price of citric acid falls from $300 per ton to $100 per

ton.

own price

quantity

supply @ citric acid price of $300/ton

Market for lemon-lime

How will this affect the supply curve for lemon-lime?

How will this affect the supply curve for lemon-lime?

Go to hidden slide

Supply slide 16

Change in technology

An improvement in technology makes it possible to produce a level of output with fewer inputs than before.

Because this lowers the cost of production, profits rise, and firms will try to supply more.

Supply slide 17

own price

quantity

supply with old technology

Market for lemon-lime

Suppose lemon-lime technology improves.

How does this affectthe supply curve for lemon-lime?

How does this affectthe supply curve for lemon-lime?

Go to hidden slide

Supply slide 19

price

Q

S (no tax)

How would you suspect an excise tax affects the supply of a good?

Go to hidden slide

Supply slide 21

Supply summary

Supply is a function of own price, input prices, and technology.

The supply curve shows supply as a function of own price, all else constant.

Changes in a good’s own price show up as movements along a supply curve.

Changes in input prices, technology, expectations, or taxes show up as shifts in the supply curve.