ECON107Principles of

MicroeconomicsWeek 5

SEPTEMBER 2013

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Chapter-3

3 Supply

Lesson Objectives Define supply and quantity supplied Explain law of supply and influences of

supply Explain how to draw supply curve and

make supply schedule Explain how demand and supply

determine prices and quantities bought and sold

Use the demand and supply model to make predictions about changes in prices and quantities

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SupplySupply refers how much of a

particular good producers are willing and able to sell at a given price during a given period.

Quantity supplied refers the quantity of a commodity that producers are willing to sell at a particular price at a particular point of time when other things constant.

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Supply

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A Movement Along the Supply Curve

When the price of the good changes and other influences on sellers’ plans remain the same, the quantity supplied changes and there is a movement along the supply curve.

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Supply

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A Shift of the Supply Curve

If the price remains the same but some other influence on sellers’ plans changes, supply changes and the supply curve shifts.

Law of Supply

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As Price Rises…

…Quantity Supplied Rises

As Price Falls…

…Quantity Supplied Falls

Other things remaining the same, A direct relationship exists between price and quantity supplied

Supply Curve and Supply Schedule

The supply curve shows the relationship between the quantity supplied of a good and its price when all other influences on producers’ planned sales remain the same.

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SUPPLY SCHEDULE

Various AmountsVarious AmountsA Series of Possible PricesA Series of Possible Prices

…a specified time period

…other things being equal

$12345

P QS

CORN

520355060

ABCDE

Supply Curve and Supply Schedule

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o

SP

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

$54321

60503520 5

P QS

Price of Corn

Quantity of Corn

CORN

Connect the Points

The lowest price at which someone is willing to sell an additional unit is marginal cost.

A Change in Supply (Determinants or Factors of Supply)

Six main factors (determinants) that change supply. These are as follows:

Prices of Relevant Resources (Factors of production)

Technology Taxes, Subsidies, & State of

Nature Prices of Related Goods produced. Producer Expectations on future

prices. Number of Sellers (suppliers)

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A Change in Supply (Determinants or Factors of Supply)

Prices of Relevant Resource (Factors of production)

Relevant resources are those employed in the production of the good in question.

If the price of some relevant resource increases production cost increase Amount of production decrease supply decreases supply curve shifts to the left.

If the price of some relevant resource decreases production cost decrease Amount of production increase supply increases supply curve shifts to the right .

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A Change in Supply (Determinants or Factors of Supply)

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SP

Qo

$5

4

3

2

1

10 20 30 40 50 60 70 80

Price of Corn

Quantity of Corn

$54321

60503520 5

P QS

CORN

8070604530

S’Increase in

Supply

Increasein QuantitySupplied

TechnologyIf a more efficient technology is

discovered, same resource can produce more production costs fall suppliers will be more willing and able to supply the good rightward shift of the supply curve.

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A Change in Supply (Determinants or Factors of Supply)

Prices of Related Goods produced For example, if the price of Soybean

oil increases to produce more they will hire more resources with bit higher price the corn oil producers will get less resources to produce their products supply of corn oil declines and supply curve for corn oil shifts leftward.

Conversely, a fall in the price of soybean makes corn oil production more profitable supply for corn oil increases and supply curve shifts rightward.

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A Change in Supply (Determinants or Factors of Supply)

Prices of Related Goods produced

Goods are complements in production if they must be produced together.

The supply of a good increases if the price of a complement in production rises (printer vs. ink jet cartridge OR a left shoe and a right).

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A Change in Supply (Determinants or Factors of Supply)

Producer Expectations on future prices. Changes in producer expectations with respect to the future can change current supply.If iPhone suppliers expect higher prices in the future, they may begin to expand their product today and stock current supply decreases supply curve shifts leftward.If iPhone suppliers expect lower prices in the future, they will try to sell all of their products today current supply increases supply curve shifts rightward.

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A Change in Supply (Determinants or Factors of Supply)

Number of Sellers (suppliers)If the number of producers increases, supply increases shifts to the right

If the number of producers decreases, supply will decrease shift to the left

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A Change in Supply (Determinants or Factors of Supply)

Taxes, Subsidies, & State of NatureBusinesses treat most taxes as costs. An increase in sales or property taxes will increase production costs and reduce supply, supply curve shifts leftward. Vice versa also true.If government subsidizes the production of a good, it reduce the producers production costs and supply increase and supply curve shifts rightward.

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A Change in Supply (Determinants or Factors of Supply)

Taxes, Subsidies, & State of NatureThe state of nature includes all the natural forces that influence production—for example, the weather.

Any favorable natural forces increases amount of production which turn to increase supply and shifts the supply curve rightward.

Any unfavorable natural forces decreases amount of production which turn to decrease supply and shifts the supply curve leftward.

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A Change in Supply (Determinants or Factors of Supply)

Now it’s over for today. Do Now it’s over for today. Do you have any question? you have any question?

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