Supply
A firm¶s quantity supplied o supplied of a good is the specific amount its managers would choose to sell over some time period, given ± ±
A particular price f or the good All other constraints on the firm
Market
quantity supplied (or quantity supplied) is
the specific amount of a good that all sellers in the market would choose to sell over some time period, given ± ±
A particular price f or the good All other constraints on firms 1
Q uantity uantity Supplied
Implies a choice ±
uantity that gives firms the highest possible profits when they take Q uantity account of the constraints presented to them by the real world
Is hypothetical ±
Does not make assumptions about firms¶ ability to sell the good
±
How much would firms¶ managers want to sell, given the price of the good and all other constraints they must consider?
Stresses price ±
The price of the good is just one variable among many that influences quantity supplied
±
We¶ll assume that all other influences on supply are held constant, so we can explore the relationship between price and quantity supplied
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The Law of Supply
States States that when the price of a good rises and everything else remains the same, the quantity of the good supplied will rise ±
The words, ³everything else remains the same´ are important
In the real world many variables change simultaneously
However, in order to understand the economy we must first understand each variable separately
We assume ³everything else remains the same´ in order to understand how supply reacts to price
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The Supply Schedule and The Supply Curve
Supply schedule²shows quantities of a good or service firms would choose to produce and sell at different prices, with all other variables held constant
Supply cur ve²graphical depiction of a supply schedule ±
Shows quantity of a good or service supplied at various prices, with all other variables held constant 4
The Supply Curve Price per Bottle
When the price is Rs.2.00 per bottle, 40,000 bottles are supplied (point F ). ).
Rs.4.00
2.00
S
G
At Rs.4.00 per bottle, quantity supplied is 60,000 60,000 bottles bottles (point (point G).
F
40,000
60,000
Number of Bottles per Month 5
Shifts vs. Movements Along the Supply Curve
A change in the price of a good causes a movement along the supply curve
A rise (fall ) in price would cause a rightward (leftward) movement along the supply curve
A drop in transportation costs will cause a shift in the supply cur ve itself
Supply curve has shifted to the right of the old curve as transportation costs have dropped
A change in any variable that affects supply²except f or the good¶s price²causes the supply curve to shift
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A Shift of The Supply Cur ve
Price per Bottle
A decrease in transportation costs shifts the supply curve for maple syrup from S 1 to S 2 .
S 1
S 2
At each price, more bottles are supplied after the shift Rs.4.00
G
60,000
J
80,000
Number of Bottles per Month 7
Factors
Input prices ±
A fall (rise) in the price of an input causes an increase (decrease) in supply, shifting the supply cur ve to the right (left)
Price of Related Goods ±
That That Shift the Supply Cur ve
When the price of an alternate good rises (falls), the supply curve f or the good in question shifts leftward (rightward)
Technology ±
Cost-saving technological advances increase the supply of a good, shifting the supply cur ve to the right 8
Factors
Number of Firms ±
That That Shift the Supply Cur ve
An increase (decrease) in the number of sellers² with no other changes²shifts the supply cur ve to the right (left)
Expected Price ±
An expectation of a future price increase (decrease) shifts the current supply cur ve to the left (right)
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Factors
Changes in weather ±
±
That That Shift the Supply Cur ve
Favorable
weather
Increases crop yields
Causes a rightward shift of the supply curve f or that crop
Unfavorable weather
Destroys crops
Shrinks yields
Shifts the supply curve leftward
Other unfavorable natural events may effect all firms in an area ±
Causing a leftward shift in the supply cur ve 10
Changes in Supply and in Q uantity uantity Supplied Price
S
Price
increase moves us rightward along supply curve
P 2
P 1
Price
increase moves us leftward along supply curve
P 3
Q3
Q1
Q2
Quantity 11
Changes in Supply and in Q uantity uantity Supplied Price
Entire
supply curve shifts rightward when: price of of input input price price of alterna alternate te good good price number of firms expected price technological advance favorable weather
S 1 S 2
Quantity
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Changes in Supply and in Q uantity uantity Supplied Price
Entire
supply curve shifts rightward when: price price of of input input price price of alterna alternate te good good number of firms expected price unfavorable weather
S 2 S 1
Quantity
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Summary: Factors That Shift The Supply Curve
The short list of shift-variables f or supply that we have discussed is far from exhaustive
In some cases, even the threat of such events can cause serious effects on production
Basic principle is always the same ±
Anything that makes sellers want to sell more or less of a good at any given price will shift supply cur ve
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Equilibrium: Putting Supply and Demand Together
When a market is in equilibrium ± ±
Both price of good and quantity bought and sold have settled into a state of rest The equilibrium price and equilibrium quantity are values f or price and quantity in the market but, once achieved, will remain constant
Unless and until supply cur ve or demand curve shifts
The equilibrium price an d equilibrium quantity can be f ound on the vertical and horizontal axes, respectively ±
At point where supply and demand curves cross
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Market Equilibrium Price per Bottle
2. causes the price price to rise . . .
3. shrinki shrinking ng the excess demand . . . S
E
Rs.3.00
1.00
1. At
a price of Rs.1.00 per bottle an excess demand of 50,000 bottles . . .
H
4. until price price reaches reaches its equilibrium value of Rs.3.00 . J
Excess
Demand
25,000 50,000 75,000
D
Number of Bottles per Month 16
Excess Demand
Excess demand ±
At a given price, the excess of quantity demanded over quantity supplied
Price of the good will rise as buyers compete with each other to get more of the good than is available
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Excess Supply and Price Ad justment 1. At
Price per Bottle
a price price of Rs. 5.00 per per bottle an excess supply of 30,000 bottles . . . Excess
Rs.5.00 2. causes causes the the price to drop, 3.00
Supply at Rs. 5.00 S
3. shrinki shrinking ng the excess supply . . .
L
K E
4. until price reaches reaches its equilibrium value of Rs. 3.00. D
35,000 50,000 65,000
Number of Bottles per Month 18
Excess Supply
Excess Supply ±
At a given price, the excess of quantity supplied over quantity demanded
Price of the good will fall as sellers compete with each other to sell more of the good than buyers want
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Solve f or Equilibrium Algebraically
Suppose that demand is given by the , where equation D is D Q 10is P the price of the good. quantity dQeman140 ded, P Supply is given by where is S 80 5 P Q quantity supplie d. s Q What is the equilibrium price an d quantity? !
!
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Income Rises: What Happens When Things Change
Income rises, causing an increase in demand ±
Rightward shift in the demand curve causes rightward movement along the supply cur ve
±
Equilibrium price an d equilibrium quantity both rise
Shift of one curve causes a movement along the other curve to new equilibrium point
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Price per Bottle
4. Equilibrium price increases
3. to a new new equilibrium.
S
2. moves moves us along along the supply curve . . .
F'
Rs. 4.00
1. An
3.00
increa increase se in demand . . .
E
D2 D1
5. and equilibrium equilibrium quantity quantity 50,000 60,000 increases too.
Number of Bottles of Maple Syrup per Period 22
Both Curves Shift
When just one curve shifts (and we know the direction of the shift ) we can determine the direction that both equilibrium price an d quantity will move
When both curves shift (and we know the direction of the shifts) we can determine the direction f or either price or quantity²but not both ±
Direction of the other will depend on which cur ve shifts by more
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