1

Objectives:Objectives:

Understand the difference betweenUnderstand the difference between supplysupply andand quantityquantity supplied.supplied.

Define the Define the “Law of Supply”“Law of Supply” and explain why the supply curve is and explain why the supply curve is usually upward sloping.usually upward sloping.

Understand the difference between a Understand the difference between a change in supplychange in supply and a and a change in quantity suppliedchange in quantity supplied..

Understand what causes the Understand what causes the supply curve to shiftsupply curve to shift.

Module 3: Market Mechanism - SupplyModule 3: Market Mechanism - SupplyModule 3: Market Mechanism - SupplyModule 3: Market Mechanism - Supply

2

A supply curvesupply curve shows the quantities supplied by a producer at various prices.

Understand the difference between supply and quantity supplied.Understand the difference between supply and quantity supplied.Understand the difference between supply and quantity supplied.Understand the difference between supply and quantity supplied.Objective 1Objective 1Objective 1Objective 1

Price

per cup ($)

Quantity Supplied

(cups of coffee)

$0.50 0

1.00 1

1.50 2

2.00 3

2.50 4

3.00 5

3.50 6

4.00 7

4.50 8

5.00 9

Chris’ Supply Schedule Chris’ Supply Curve

The supply curve shows the relationship between the priceprice of a product and the quantity suppliedquantity supplied of that product.

3

Quantity suppliedQuantity supplied is the quantity of a product that a firm is willing and able to supply at a particularparticular price.

Quantity suppliedQuantity supplied refers to a point on the supply curve.

If the price of coffee is $3, Chris is willing to supply 5 cups of coffee. (point “l”). If the price rises to $4, Chris is willing to supply 7 cups of coffee (point “n”).

Objective 1:…..supply and quantity supplied….Objective 1:…..supply and quantity supplied….Objective 1:…..supply and quantity supplied….Objective 1:…..supply and quantity supplied….

Quantity supplied

4

Chris’ Supply Schedule

Price

per cup ($)

Quantity Supplied

(cups of coffee)

$0.50 0

1.00 1

1.50 2

2.00 3

2.50 4

3.00 5

3.50 6

4.00 7

4.50 8

5.00 9

Chris’ Supply Curve

The supply curve shows the relationship between the priceprice of a product and the quantity suppliedquantity supplied of that product.

5

Objective 1:…..supply and quantity supplied….Objective 1:…..supply and quantity supplied….Objective 1:…..supply and quantity supplied….Objective 1:…..supply and quantity supplied….

Supply versus Quantity Supplied: Supply refers to the entire curve while quantity supplied is associated with a point on the curve.

6

The Law of SupplyLaw of Supply states that holding everything else constant, an increase in the price of a product causes an increase in the

quantity supplied and a decrease in the price of a product causes a decrease in the quantity supplied.

Define the “Law of Supply” and explain why theDefine the “Law of Supply” and explain why the supply supply curve is usually upward sloping.curve is usually upward sloping.

Objective 2Objective 2

7

Two factors explain the Law of Supply:

1. Profit motive:Profit motive: A higher market price, holding all else constant induces suppliers to increase quantity supplied because profit margins increase.

2. The law of Increasing Opportunity Cost:The law of Increasing Opportunity Cost: As more and more is produced, resources must be drawn away from alternative uses, bidding up the opportunity cost. Thus, producers require higher prices to supply more of a product.

Objective 2: …… and explain why the supply curve is usually upward sloping.Objective 2: …… and explain why the supply curve is usually upward sloping.

8

Understand the difference between a change in quantity supplied and a change in supply.

A change in quantity supplied refers to a movement along a supply curve in response to a change in the price of the product.

Objective 3

Quantity supplied changes when price changes

9

A change in supplychange in supply is shown as a shift of the entire supply curve. In other words, at every price, quantity supplied has now changed.

A change in supplychange in supply is notnot caused by a change in price.

A change in supplychange in supply is caused by a change in factors other than the price of the good in question.

Objective 3: ….a change in quantity supplied and a Objective 3: ….a change in quantity supplied and a change in supply.change in supply.

10

Initially at a price of $2.50, Chris was willing to supply 4 cups of coffee but now at the same price he is willing to supply 3 cups of coffee (from “k” to “v”).

An decrease in supplydecrease in supply is represented by a leftward shiftleftward shift of the supply curve.

ObjectiveObjective 3 3 ……..a……..a change in supplychange in supply

11

Initially at a price of $1.00, Chris was willing to supply 1 cup of coffee but now at the same price he is willing to supply 3 cups of coffee (from “g” to “r”).

An increase in supplyincrease in supply is represented by a rightward shiftrightward shift of the supply curve.

Objective 3 ……..a change in supplyObjective 3 ……..a change in supply

12

Objective 4Objective 4

Understand what causes the supply curve to shiftUnderstand what causes the supply curve to shift

1. Price of the good

2. Prices of inputs such

as wages

3. Technological change

4. Prices of substitutes in production (rival goods)

5. Price of complements in production (jointly produced goods)

6. Number of firms in the market

7. Expectations of suppliers about future prices

8. Government policies that affect production

Determinants of Supply include:Determinants of Supply include:

13

A change in any determinant other than the price of the good in question causes a shift of the supply curve.

Along a supply curve, only price and quantity supplied change; all other determinants are held constant.

Objective 4:… what causes the supply curve to shiftObjective 4:… what causes the supply curve to shift

14

Objective 4: …examples of supply shiftersObjective 4: …examples of supply shifters

Example 1: The United Auto Workers (UAW) has successfully negotiated higher wages. What happens in the auto industry?

Do not confuse wages (supply determinant)

with income (demand determinant).

An increase in wages increase the cost of production. The supply curve shifts left.

15

Example 2:Example 2: Suppose suppliers of silver expect the price of silver to fall next month. How does this affect the supply of silver today?

Today, supply increases in anticipation of lower prices in the future.

S1: Today’s supply curve with a new set of expectations about price

S0: Today’s demand curve with some given set of expectations about price

Today’s price

Change in producers’ expectations about future pricesChange in producers’ expectations about future prices

The Supply of Silver

16

A decrease in the price of soybean will decrease the quantity supplied of soybean. This is depicted by a movement along the supply curve for soybean.

Farmers now allocate more land toward producing corn. The supply curve for corn shifts right.

A decreasedecrease in the price of soybeans leads to an increaseincrease in the supply of corn, given that soybean and corn are rivals in productionrivals in production.

Change in the price of a rival goodChange in the price of a rival good

17

Example 3:Example 3: Land is used to grow soybean and corn. What happens to the supply of corn following a decrease in the price of soybeans?

Soybeans and corn are substitutes in production or rivalsubstitutes in production or rival goodsgoods.

When two goods are rivals in production, they must share at least one common inputcommon input. In this example, land is the common input and soybean and corn are rivals in production.

Change in the price of a rival (in production) goodChange in the price of a rival (in production) good

18

Two goods S and C are rivals (or substitutes) in production if a decrease in the price of good Sdecrease in the price of good S leads to an increase in the supply of good Cincrease in the supply of good C or if an increase in the price of good S leads to an decrease in the supply of

good C.

A negativenegative relationship exists between the price of good S and the supply of good C

Do Not Confuse substitutes in consumption with rivals in production (also called “substitutes in production”).

Definition of Rivals in ProductionDefinition of Rivals in Production