4. What is Supply?What is Supply?
• Supply is how much a firm is willing 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
5. Law of SupplyLaw 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.
• While demand typically refers to
consumers, supply typically refers to firms.
6. Supply Schedules and CurvesSupply Schedules and Curves
• Just like we were able to construct a
Demand Schedule and Demand Curve, we
will do the same for Supply
• Supply Schedule - a table showing the
relationship between the price of a good and
the quantity supplied per period of time,
ceteris paribus.
11. Supply Schedules and CurvesSupply Schedules and Curves
• Supply Curve - a diagram showing the
relationship between the price of a good and
the quantity supplied per period of time,
ceteris paribus.
19. Market Supply CurveMarket Supply Curve
• Market Supply Curve - a curve showing the
relationship between the price of a good and
the total quantity supplied by all firms in the
market per period of time, ceteris paribus.
• Market supply curves are obtained by
summing the supply curves of individual
firms.
20. Market Supply ScheduleMarket Supply Schedule
• Market Supply Schedule - a table showing
the relationship between the price of a good
and the total quantity supplied by all firms
in the market per period of time, ceteris
paribus.
• Market supply schedules are obtained by
summing the supply curves of individual
firms.
22. Change in S vs. Change in QChange in S vs. Change in Qss
• Change in Supply - a shift of the supply
curve
• A supply curve is drawn under the
assumption of ceteris paribus.
• When this assumption is relaxed, the entire
supply curves shifts
23. Change in S vs. Change in QChange in S vs. Change in Qss
• Changes in Supply
• Increase in supply - supply curve shifts to the
right
• Decrease in supply - supply curve shifts to the
left
24. Change in SupplyChange in Supply
Factors Which Cause a Change in Supply
• Prices of Relevant Resources
• Technology
• Number of Sellers
• Expectations of Future Price
• Taxes and Subsidies
• Changes in the Availability of Credit
25. Price of Relevant ResourcesPrice of Relevant Resources
• Let’s say the cost of plastic (used in making
CDs) decreases
• It is now cheaper to make every quantity of
CDs
26. Resource Price DecreaseResource 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 $20
to make them want to supply 15 CDs?
– No, in order to make the same profit they are
willing to take a lower price
28. Resource Price DecreaseResource Price Decrease
• Thus the firm is willing to supply every
quantity at a lower price.
• Or in other words, at every price the firm is
willing to supply more of the good
• In summary, if the price of a resource goes
down, supply increases (shifts to the right)
29. Supply Curve ShiftSupply Curve Shift
P($)
Qs per month
5
10
15
20
0 5 10 15
A
A’
Old Supply Curve
New Supply Curve
30. Price of Relevant ResourcesPrice of Relevant Resources
• Let’s say the cost of plastic (used in making
CDs) increases
• It is now more expensive to make every
quantity of CDs
31. Resource Price DecreaseResource Price Decrease
• 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 $15 to
make them want to supply 7 CDs?
– No, in order to make the same profit they are
going to need a higher price to cover the higher
costs
33. Resource Price DecreaseResource Price Decrease
• Thus the firm is willing to supply every
quantity at a higher price.
• Or in other words, at every price the firm is
willing to supply less of the good
• In summary, if the price of a resource goes
up, supply decreases (shifts to the left)
34. Supply Curve ShiftSupply Curve Shift
P($)
Qs per month
5
10
15
20
0 5 10 15
B
B’ Old Supply Curve
New Supply Curve
35. TechnologyTechnology
• Improvement in technology lowers costs
• Lower cost of production increases Supply
• Worsening of technology increases costs
• Higher cos of production decreases Supply
36. Number of SellersNumber of Sellers
• More sellers in the market means more
quantity is being supplied at every price
• Increase in supply of the good
• Less sellers in the market means less
quantity is being supplied at every price
• Decrease supply of the good
37. Expectations of Future PricesExpectations of Future Prices
• Firms expect price of their good to decrease
in the future
• Supply increases today
• Firm would prefer to sell today when price is
higher
38. Expectations of Future PricesExpectations of Future Prices
• Firms expect price of their good to increase
in the future
• Supply decreases today
• Firm would prefer to wait until the good can be
sold for a higher price
39. Taxes and SubsidiesTaxes and Subsidies
• Increase in tax on the good decreases
supply
• Raises the cost of production
• Decrease in tax on the good increases
supply
• Lowers the cost of production
40. Taxes and SubsidiesTaxes and Subsidies
• A subsidy is an amount the paid to the
producer for each unit of a good produced
• Increase in Subsidy on the Good Increases
Supply
• Lowers the costs of production
• Decrease in Subsidy on the Good Decreases
Supply
• Raises the costs of production
41. Availability of CreditAvailability of Credit
• If it is easier for the firm to borrow money,
the firm will be able to produce more
– Thus Supply increases
• If it is more difficult for the firm to borrow
money, the firm will have to produce less
– Thus Supply decreases
42. Change in Quantity SuppliedChange in Quantity Supplied
• Change in Quantity Supplied (∆Qs) -
movement along a supply curve
• A change in quantity supplied can only be
caused by a change in the price of the good.
• Changes in Quantity Supplied
• Increase in Qs - a movement to the right along a
supply curve
• Decrease in Qs - a movement to the left along a
supply curve
