supply

Supply

Supply

• The analysis of the supply of produced goods has two parts:

– An analysis of the supply of the factors of production to households and firms.

– An analysis of why firms transform those factors of production into usable goods and services.

The Law of Supply

• There is a direct relationship between price and quantity supplied.– Quantity supplied rises as price rises, other things

constant.– Quantity supplied falls as price falls, other things

constant.

Law of Supply• Law of Supply

– As the price of a product rises, producers will be willing to supply more.

– The height of the supply curve at any quantity shows the minimum price necessary to induce producers to supply that next unit to market.

– The height of the supply curve at any quantity also shows the opportunity cost of producing the next unit of the good.

The Law of Supply

• The law of supply is accounted for by two factors:

– When prices rise, firms substitute production of one good for another.

– Assuming firms’ costs are constant, a higher price means higher profits.

The Law of Supply

• The law of supply states that there is a positive relationship between price and quantity of a good supplied.

• This means that supply curves typically have a positive slope.

0

1

2

3

4

5

6

0 10 20 30 40 50Thousands of bushels of soybeans

produced per year

Pric

e of

soy

bean

s pe

r bus

hel (

$)

Supply Schedule• A supply schedule

shows how much of a good or service would be supplied at different prices.

Supply Schedule for Coffee Beans

Price of coffee beans(per pound)

Quantity ofcoffee beans

supplied(billions of pounds)

$2.00 11.6

1.75 11.5

1.50 11.2

1.25 10.7

1.00 10.0

0.75 9.10.50 8.0

Supply Curve

Quantity of coffee beans (billions of pounds)

Price of coffee beans (per pound)

70 9 11 1513 17

$2.00

1.75

1.50

1.25

1.00

0.75

0.50

As price rises, the quantity supplied

rises.

A supply curve shows graphically how much of a good or service people are willing to sell at any given price.

Supply curve, S

1. Changes in input prices (Cost of Resources)– An input is a good that is used to produce another good.

2. Change in productivity-more output using the same amount of input

3. Changes in technology4. Taxes and Subsidies/government regulations5. Changes in expectations6. Changes in the number of sellers7. Nature8. Price of Related Goods

What Causes a Supply Curve to Shift?

An Increase in Supply• The entry of Vietnam

into the coffee bean business generated an increase in supply—a rise in the quantity supplied at any given price.

• This event is represented by the two supply schedules—one showing supply before Vietnam’s entry, the other showing supply after Vietnam came in.

Supply Schedule for Coffee Beans


Quantity of beans supplied (billions of pounds)

Before entry After entry$2.00 11.6 13.91.75 11.5 13.81.50 11.2 13.41.25 10.7 12.81.00 10.0 12.00.75 9.1 10.90.50 8.0 9.6

An Increase in Supply

A shift of the supply curve is a change in the quantity supplied of a good at any given price.

70 9 11 13 15 17

$2.00

1.75

1.50

1.25

1.00

0.75

0.50

S1 S2

Price of coffee beans (per

pound)


… is not the same thing as a shift of the supply curve

A movement along the supply curve…

A Change in Supply Versusa Change in Quantity Supplied

To summarize:

Change in price of a good or service leads to

Change in quantity supplied(Movement along the curve).

Change in costs, input prices, technology, or prices of related goods and services

leads to

Change in supply(Shift of curve).

From Individual Supplyto Market Supply

• The supply of a good or service can be defined for an individual firm, or for a group of firms that make up a market or an industry.

• Market supply is the sum of all the quantities of a good or service supplied per period by all the firms selling in the market for that good or service.

Market Supply

• As with market demand, market supply is the horizontal summation of individual firms’ supply curves.

Elasticity of Supply

• Elasticity of Supply: a measure of the way suppliers respond to a change in price

Elasticity of Supply• A supplier’s responsiveness to a price change is

called _________________• (think like a supplier/seller)• 3 Factors that will determine a product’s elasticity1. Availability of resources required to make the

product2. Amount of time required to make the product3. Skill level of the worker needed to make the

product

Elasticity of Supply

Elastic Supply• A product has elastic supply when a price change

causes a significant change in the quantity supplied. (What would have to be true (of a product) to allow a seller to quickly increase production if the market price goes up?)

1. Abundance of resources required to make the product

2. Product can be made quickly3. Low skill level of workers required

Inelastic Supply

• A price change causes very little change in the quantity supplied= Inelastic. This happens because…

• 1.The product requires scarce resources• 2. It takes a long time to make• 3. It requires a high skill level of workers• examples?• Hand crafted furniture• diamonds

Supply, Demand and Equilibrium• Equilibrium in a competitive market: when the quantity

demanded of a good equals the quantity supplied of that good.

• The price at which this takes place is the equilibrium price (a.k.a. market-clearing price):

– Every buyer finds a seller and vice versa.

– The quantity of the good bought and sold at that price is the equilibrium quantity.

Market Equilibrium

• Only in equilibrium is quantity supplied equal to quantity demanded.

• At any price level other than P0, the wishes of buyers and sellers do not coincide.

There is a surplus of a good when the quantity supplied exceeds the quantity demanded. Surpluses occur when the price is above its equilibrium level.

70 10 1513 17

$2.00

1.75

1.50

1.25

1.00

0.75

0.50

Supply

Demand

8.1 11.2

E

Surplus

Quantity demanded

Quantity supplied



Surplus

70 10 1513 17

$2.00

1.75

1.50

1.25

1.00

0.75

0.50

Supply

Demand

9.1 11.5

E

Shortage

Quantity demanded

Quantity supplied



There is a shortage of a good when the quantity demanded exceeds the quantity supplied. Shortages occur when the price is below its equilibrium level.

Shortage

Technology Shifts of the Supply CurvePrice

Quantity

S1

Demand

E1

E2

An increase in supply …

P2

P1

Q1 Q2

… leads to a movement along the demand curve to a lower equilibrium price and higher equilibrium quantity.

Price falls

Quantity increases

S2

Technological innovation: In the early 1970s, engineers learned how to put microscopic electronic components onto a silicon chip; progress in the technique has allowed ever more components to be put on each chip.

Market equilibrium occurs at point E, where the supply curve and the demand curve intersect.



70 10 1513 17

$2.00

1.75

1.50

1.25

1.00

0.75

0.50

Supply

Demand

E EquilibriumEquilibrium price

Equilibrium quantity

Market Equilibrium

Equilibrium and Shifts of the Demand Curve

Q2Q 1

P2

P1

D 2

Supply

D 1

E2

E1

Price of coffee beans

Quantity of coffee beans

Price rises

Quantity rises

An increase in demand…

… leads to a movement along the supply curve due to a higher equilibrium price and higher equilibrium quantity

Simultaneous Shifts of Supply and Demand

Two opposing forces determining the equilibrium quantity.

The increase in demand dominates the decrease in supply.

Quantity of coffeeQ2Q 1

P 2

P 1

S2

D 2D 1

S1

E1

E2

(a) One possible outcome: Price Rises, Quantity Rises

Price of coffee Small decrease in supply

Large increase in demand


Two opposing forces determining the equilibrium quantity.

Q1

Q2

P2

P1

S2

D 2D 1

S1

E1

E2

(b) Another Possibility Outcome: Price Rises, Quantity FallsPrice of coffee

Quantity of coffee

Large decrease in supply

Small increase in demand


We can make the following predictions about the outcome when the supply and demand curves shift simultaneously:


Supply Increases Supply Decreases

Demand Increases

Price: ambiguousQuantity: up

Price: upQuantity: ambiguous

Demand Decreases

Price: downQuantity: ambiguous

Price: ambiguousQuantity: down

• A recent drought in Australia reduced the amount of grass on which Australian dairy cows could feed, thus limiting the amount of milk these cows produced for export.

• At the same time, a new tax levied by the government of Argentina raised the price of the milk the country exported, thereby decreasing Argentine milk sales worldwide.

• These two developments produced a supply shortage in the world market, which dairy farmers in Europe couldn’t fill because of strict production quotas set by the European Union.

Demand and Supply Shifts at Work in the Global Economy

• In China, meanwhile, demand for milk and milk products increased, as rising income levels drove higher per-capita consumption.

• All these occurrences resulted in a strong upward pressure on the price of milk everywhere in 2007.

Demand and Supply Shifts at Work in the Global Economy

31

Click the mouse button or press the Space Bar to display the information.

• Producing an economic good or service requires a combination of land, labor, capital, and entrepreneurs.

• The theory of production deals with the relationship between the factors of production and the output of goods and services.

• Whether they are film producers of multimillion-dollar epics or small firms that market a single product, suppliers face a difficult task.

32Click the mouse button or press the Space Bar to display the information.

)

• This contrasts with the long run, a period of production long enough for producers to adjust the quantities of all their resources, including capital.

• The theory of production generally is based on the short run, a period of production that allows producers to change only the amount of the variable input called labor.


• For example, Ford Motors hiring 300 extra workers for one of its plants is a short-run adjustment.

• If Ford builds a new factory, this is a long-run adjustment.

34

• Total product is the total output the company produces: a production schedule shows that, as more workers are added, total product rises until a point that adding more workers causes a decline in total product.

• Marginal product is the extra output or change in total product caused by adding one more unit of variable input.


• In Stage I, (increasing returns), marginal output increases with each new worker. Companies are tempted to hire more workers, which moves them to Stage II.

• In Stage II, (diminishing returns), total production keeps growing but the rate of increase is smaller; each worker is still making a positive contribution to total output, but it is diminishing.


• In Stage III (negative returns), marginal product becomes negative, decreasing total plant output.

37

Figure 5.5bFigure 5.5b


Figure 5.5aFigure 5.5a

39

• Overhead is one of many different measures of costs.


• Fixed costs are those that a business has even if it has no output. These include management salaries, rent, taxes, and depreciation on capital goods.

• Variable costs are those that change when the rate of operation or production changes, including hourly labor, raw materials, freight charges, and electricity.


• Total cost is the sum of all fixed costs and all variable costs.

• Marginal cost is the extra (variable) costs incurred when a business produces one additional unit of a product.

supply

Documents

supply curvethe supply

supply curves

showing supply

supply schedulesone

corresponding supply

supply of produced goods

price rises

given price