Supply

A firms quantity supplied of a good is the specific amount its managers would choose to sell over some time period, given
A particular price for the good All other constraints on the firm

Market quantity supplied (or quantity supplied) is the specific amount of a good that all sellers in the market would choose to sell over some time period, given
A particular price for the good All other constraints on firms
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Quantity Supplied
Implies a choice
Quantity that gives firms the highest possible profits when they take account of the constraints presented to them by the real world

Is hypothetical
Does not make assumptions about firms ability to sell the good How much would firms managers want to sell, given the price of the good and all other constraints they must consider?

Stresses price
The price of the good is just one variable among many that influences quantity supplied Well assume that all other influences on supply are held constant, so we can explore the relationship between price and quantity supplied

The Law of Supply

States that when the price of a good rises and everything else remains the same, the quantity of the good supplied will rise
The words, everything else remains the same are important
In the real world many variables change simultaneously However, in order to understand the economy we must first understand each variable separately We assume everything else remains the same in order to understand how supply reacts to price

 Supply scheduleshows quantities of a good or service firms would choose to produce and sell at different prices, with all other variables held constant Supply curvegraphical depiction of a supply schedule
Shows quantity of a good or service supplied at various prices, with all other variables held constant

The Supply Schedule and The Supply Curve

The Supply Curve

Price per Bottle
When the price is Rs.2.00 per bottle, 40,000 bottles are supplied (point F).

Rs.4.00

G At Rs.4.00 per bottle, quantity supplied is 60,000 bottles (point G).

2.00

40,000

60,000

Number of Bottles per Month

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 A change in the price of a good causes a movement along the supply curve

Shifts vs. Movements Along the Supply Curve

A rise (fall) in price would cause a rightward (leftward) movement along the supply curve

A drop in transportation costs will cause a shift in the supply curve itself
Supply curve has shifted to the right of the old curve as transportation costs have dropped A change in any variable that affects supplyexcept for the goods pricecauses the supply curve to shift

A Shift of The Supply Curve

Price per Bottle A decrease in transportation costs shifts the supply curve for maple syrup from S1 to S2. At each price, more bottles are supplied after the shift Rs.4.00 G J

S1

S2

60,000

80,000

Number of Bottles per Month

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Factors That Shift the Supply Curve

Input prices
A fall (rise) in the price of an input causes an increase (decrease) in supply, shifting the supply curve to the right (left)

Price of Related Goods

When the price of an alternate good rises (falls), the supply curve for the good in question shifts leftward (rightward)

Technology
Cost-saving technological advances increase the supply of a good, shifting the supply curve to the right
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Factors That Shift the Supply Curve

Number of Firms
An increase (decrease) in the number of sellers with no other changesshifts the supply curve to the right (left)

Expected Price
An expectation of a future price increase (decrease) shifts the current supply curve to the left (right)

Factors That Shift the Supply Curve

Changes in weather
Favorable weather
Increases crop yields Causes a rightward shift of the supply curve for that crop

Unfavorable weather
Destroys crops Shrinks yields Shifts the supply curve leftward

Other unfavorable natural events may effect all firms in an area

Causing a leftward shift in the supply curve
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Changes in Supply and in Quantity Supplied

Price Price increase moves us rightward along supply curve S

P2

P1 P3

Price increase moves us leftward along supply curve

Q3

Q1

Q2

Quantity
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Changes in Supply and in Quantity Supplied

Price Entire supply curve shifts rightward when: price of input price of alternate good number of firms expected price technological advance favorable weather S1 S2

Quantity

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Changes in Supply and in Quantity Supplied

Price Entire supply curve shifts rightward when: price of input price of alternate good number of firms expected price unfavorable weather

S2
S1

Quantity

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Summary: Factors That Shift The Supply Curve

The short list of shift-variables for supply that we have discussed is far from exhaustive In some cases, even the threat of such events can cause serious effects on production Basic principle is always the same
Anything that makes sellers want to sell more or less of a good at any given price will shift supply curve

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Equilibrium: Putting Supply and Demand Together

When a market is in equilibrium
Both price of good and quantity bought and sold have settled into a state of rest The equilibrium price and equilibrium quantity are values for price and quantity in the market but, once achieved, will remain constant
Unless and until supply curve or demand curve shifts

The equilibrium price and equilibrium quantity can be found on the vertical and horizontal axes, respectively
At point where supply and demand curves cross

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Market Equilibrium
Price per Bottle 2. causes the price to rise . . . 3. shrinking the excess demand . . . S

E Rs.3.00
H
Excess Demand

4. until price reaches its equilibrium value of Rs.3.00 .

1.00

J D

1. At a price of Rs.1.00 per bottle an excess demand of 50,000 bottles . . .

25,000 50,000 75,000

Number of Bottles per Month

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Excess Demand
Excess demand
At a given price, the excess of quantity demanded over quantity supplied

Price of the good will rise as buyers compete with each other to get more of the good than is available

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Excess Supply and Price Adjustment

Price per Bottle 1. At a price of Rs. 5.00 per bottle an excess supply of 30,000 bottles . . .
Excess Supply at Rs. 5.00 S

Rs.5.00 2. causes the price to drop, 3.00

3. shrinking the excess supply . . .

K E

L 4. until price reaches its equilibrium value of Rs. 3.00.

D
35,000 50,000 65,000 Number of Bottles per Month
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Excess Supply
Excess Supply
At a given price, the excess of quantity supplied over quantity demanded

Price of the good will fall as sellers compete with each other to sell more of the good than buyers want

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Solve for Equilibrium Algebraically

Suppose that demand is given by the equation D , where is D Q Q 140 10 Pthe price of the good. quantity demanded, P is Supply is given by where is S Q 80 5P quantity supplied. Qs What is the equilibrium price and quantity?

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Income Rises: What Happens When Things Change

Income rises, causing an increase in demand
Rightward shift in the demand curve causes rightward movement along the supply curve Equilibrium price and equilibrium quantity both rise

Shift of one curve causes a movement along the other curve to new equilibrium point

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Price per Bottle

4. Equilibrium price increases

3. to a new equilibrium.
S 2. moves us along the supply curve . . . 1. An increase in demand . . .

Rs. 4.00
3.00 E

F'

D2 D1
5. and equilibrium quantity increases too. 50,000 60,000 Number of Bottles of Maple Syrup per Period
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Both Curves Shift

When just one curve shifts (and we know the direction of the shift) we can determine the direction that both equilibrium price and quantity will move When both curves shift (and we know the direction of the shifts) we can determine the direction for either price or quantitybut not both
Direction of the other will depend on which curve shifts by more

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