Markets and Supply

Overheads

Competitive agents

A buyer or seller (agent) is said to becompetitive if the agent assumes or believescompetitive if the agent assumes or believesthat the market price is giventhat the market price is givenand that the agent's actions do not influence the market price.

We call such an agent a price takerprice taker.

Supply for a competitive agent

The total amount of a good that a competitive agent would choose to produce and sell at a given price is called the quantity supplied by that agent.

The market supply of a good is the total amount that all sellers in a market would choose to produce and sell at a given price.

The Supply Function

The supply function for a good is a rulethat specifies the quantity of the goodthat will be produced and sold at a given priceholding all other factorsother factors that affectthe quantity supplied of the good constantconstant.

The Supply Function

S h(P, ZS)

ZS = (z1, z2, z3, . . . , zv)

S = quantity supplied

P = price of the good

ZS = other factors that affect supply

The Law of Supply

The law of supply states that whenthe price of a good rises,and everything else remains the same, the quantity of the good supplied will rise.

The Supply Schedule

The supply schedule is a list showingthe quantitiesquantities of a good that firms will chooseto produce and sell at different pricesproduce and sell at different prices,with all other variables held constant

Price (per lb) Quantity supplied

0 0

0.3 1000

1.20 40001.50 50001.80 60002.10 70002.40 80002.50 90003.00 10000

0.60 2000

0.90 3000

Supply of Hamburger

The Supply Curve

The supply curve is a graphical depictionof a supply schedulesupply schedule;

a line showing the quantity of a good or service supplied at various prices,

with all other variables held constantother variables held constant.

Supply of Hamburger Patties

00.5

11.5

22.5

33.5

0 2000 4000 6000 8000 10000 12000

Quantity

Pri

ce

S0

The Law of Supply

The law of supplysupply says that thesupply curve has a positive slopepositive slope

(slopes upward)

Other factors in the supply functionOther factors in the supply function

Prices of inputs used to produce the good

Prices of alternative goods the firm could produce

The technology used in production

Expectations about the future price of the good

Productive capacity of the industry

S = g (P, input prices, other output prices,

Supply depends on many things

technology, capacity, expectations )

S h(P, ZS)

Changes in Supply

A change in supply is a changein the entire relationshipentire relationship between priceand quantity supplied.

An increase in supplyincrease in supply means that sellers would chooseto produce and sell moreproduce and sell more at any price.

A decrease in supplydecrease in supply means that they would chooseto supply lesssupply less at any price.

Example change in supply

.30 1000

.60 2000

.90 30001.20 40001.50 50001.80 60002.10 70002.40 80002.70 90003.00 10000

Price (per lb) Quantity Supplied

New QuantitySupplied

600120018002400300036004200480054006000

Prices of cattle rise

Changes in supply are represented by a shift Changes in supply are represented by a shift in the supply curve.in the supply curve.

Supply of Hamburger Patties

0

1

2

3

4

5

6

0 5000 10000 15000

Quantity

Pri

ce

S0S0

S1

After Rise in Cattle Prices

6,666.66

4000

Changes in supply are represented by a shift in the supply curve.

When supply increases,the supply curve shifts to the right;

when supply decreases,the supply curve shifts to the left.

Changes in supply are represented by a shift Changes in supply are represented by a shift in the supply curve.in the supply curve.

Supply of Hamburger Patties

0

1

2

3

4

5

6

0 5000 10000 15000

Quantity

Pri

ce

SS00

S2 - Decrease

S1 - Increase

Changes in supply as compared to changes in the quantity supplied

in contrast to a change in supplythat shifts the whole curve.

Along a fixed supply curve, as price changes the quantity supplied will change.

This is called a change in the quantity supplied

Change in supply

Changes in supplyChanges in supplyand changes in the quantity suppliedand changes in the quantity supplied

0

1

2

3

4

5

6

0 5000 10000 15000

Quantity

Pri

ce

S0S0

Supply of Hamburger Patties

in quantity supplied

in quantity supplied

Change in supply

Original Supply

Change in supply

Prices of inputs used to produce the good

Prices of alternative goods the firm could produce

The technology used in production

Expectations about the future price of the good

Productive capacity of the industry

Factors causing changes in supply

Effect of input prices on supply

A rise in the price of an input causesa decrease in supply,shifting the supply curve to the left.

A rise in the price of an alternative product willA rise in the price of an alternative product willdecrease the supply of the good,decrease the supply of the good,shifting the supply curve to the left.shifting the supply curve to the left.

Effect of other output prices on supply

An alternative good is another good that the firmcould produce using some of the same typeof inputs as the good in question.

Effect of productive capacity on supply

An increase in the number of firmsin an industry will increase supply,shifting the supply curve to the right.

An increase in the size of each firmAn increase in the size of each firmin an industry will increase supply,in an industry will increase supply,shifting the supply curve to the right.shifting the supply curve to the right.

Technological advance willincrease the supply of the good,shifting the supply curve to the right.

Effect of technology on supply

Expectations and Supply

If firms anticipate the price of a productwill rise in the near future,they may chooseto sell less of the product now,thus decreasing the supply.

If firms anticipate the price of a productwill fall in the near future, they may chooseto supply more of the product now.

The End

The End