Supply 1

Supply It’s Just Like Demand, but Different

Changing Roles Remember today we are talking about supply (and not demand). So you need to think about things as if you were a business trying to make the most money possible. You are NOT a consumer trying to save money. PROFIT! PROFIT! PROFIT! PROFIT!

What is Supply? Supply is how much a firm is willing and able to sell at every given price, ceteris paribus Thus, if all else remains the same and the price of a good goes up, what would you expect the response of a firm to be? To produce more, since prices are going up, so will profits

Law of Supply Law of Supply - the price of a product (or service) is directly related to the quantity supplied, ceteris paribus. Quantity Supplied - the amount of a good (or service) produced by firms at a particular price.

Supply Schedules and Curves Supply Schedule - a table showing the relationship between the price of a good and the quantity supplied per period of time, ceteris paribus.

Supply Curve - a diagram showing the relationship between the price of a good and the quantity supplied per period of time, ceteris paribus. Supply Schedules and Curves

Supply Curve P($) Remember to ALWAYS label your axes! Qs per month

Supply Curve P($) 20 15 10 5 Qs per month 0 5 10 15

Supply Curve P($) A 20 15 10 5 Qs per month 0 5 10 15

Supply Curve P($) A 20 B 15 10 5 Qs per month 0 5 10 15

Supply Curve P($) A 20 B 15 10 C 5 Qs per month 0 5 10 15

Supply Curve P($) S A 20 B 15 10 C 5 Qs per month 0 5 10 15

Market Supply Curve Just like it was for Demand, adding “Market” to the front simply means we are now talking about all firms in the market So, a Market Supply Schedule and a Market Supply Curve would be what?

Change in S vs. Change in Qs Change in Supply - a shift of the supply curve Change in Quantity Supplied (DQs) - movement along a supply curve ,[object Object],[object Object]

Increase in Supply S P S’ Qs

Increase in Qs P($) Qs per month

Increase in Qs S P($) Qs per month

Increase in Qs S P($) A Qs per month

Increase in Qs S P($) B A Qs per month

Changes in Supply Just like for demand there are a list of the “Determinants of Supply” These are the things that will cause a change in Supply.

Price of Relevant Resources If the cost of the resources used to make a product change in price. Then supply will change. Let’s say the cost of plastic (used in making CDs) decreases. What will happen to the supply of CDs? CD Supply will go up, because it is now cheaper to make CD’s at every price. Changes in Supply

Resource Price Decrease So, before the cost decrease, at a price of $20 the firm was willing to make 15 CDs. If costs go down, will the firm still need $20 to make them want to supply 15 CDs? No, in order to make the same profit they are willing to take a lower price

Supply Curve P($) A 20 15 A’ 10 5 Qs per month 0 5 10 15

Resource Price Decrease Thus the firm is willing to supply every quantity at a lower price. Or in other words, at every price the firm is willing to supply more of the good In summary, if the price of a resource goes down, supply increases (shifts to the right)

Supply Curve Shift Old Supply Curve P($) A 20 15 A’ New Supply Curve 10 5 Qs per month 0 5 10 15

Obviously the reverse is also true. In increase in the cost of plastic (used in making CDs, makes it more expensive to make every quantity of CDs Price of Relevant Resources

Resource Price Increase So, before the cost increase, at a price of $15 the firm was willing to make 7 CDs. If costs go up, will the firm still need $15 to make them want to supply 7 CDs? No, in order to make the same profit they are going to need a higher price to cover the higher costs

Supply Curve P($) B’ 20 B 15 10 5 Qs per month 0 5 10 15

Resource Price Increase Thus the firm is willing to supply every quantity at a higher price. Or in other words, at every price the firm is willing to supply less of the good In summary, if the price of a resource goes up, supply decreases (shifts to the left)

Supply Curve Shift New Supply Curve P($) Old Supply Curve B’ 20 B 15 10 5 Qs per month 0 5 10 15

Technology Similarly changes in technology can change supply Improvement in technology lowers costs ,[object Object],Worsening of technology increases costs ,[object Object],Changes in Supply

Changes in Supply Number of Sellers More sellers in the market means more quantity is being supplied at every price ,[object Object],Less sellers in the market means less quantity is being supplied at every price ,[object Object],[object Object]

Firm would prefer to sell today when price is higher

Remember, they want to make as much money as they can.,[object Object]

Firm would prefer to wait until the good can be sold for a higher price,[object Object],[object Object]

Changes in Supply Availability of Credit How easy it is to borrow money affects supply. If interest rates are low, then it is easier for the firm to borrow money and thus supply will do what? Supply increases If interest rates are high, it is more difficult for the firm to borrow money and thus supply does what? Supply decreases

Elasticity of Supply Is a measure of how Suppliers will respond to changes in the market. Operates exactly like Elasticity of Demand Inelastic - price changes have little of no effect on supply Elastic – price changes have dramatic effect of supply Just like with Demand, Time changes most things to elastic

Supply 1

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Supply 1