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DPB 1023
MICROECONOMICS
CHAPTER 2
SUPPLY THEORY
(Week 2)
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
CHAPTER 3
Objective 1
Define supply
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
DEFINITION OF SUPPLY
Objective 2
Define law of supply
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Law of Supply
Increase
Q
Increase/Decrease
P
in Supply
S2 SX S1
Decrease Increase
Q
CHAPTER 3
Objective 3
Sketch supply curve
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Supply in Output Markets
Price of
Ice-Cream
Cone
$3.00
2.50
1. An
increase
in price ... 2.00
1.50
1.00
0.50
0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity of cones supplied.
Copyright2003 Southwestern/Thomson Learning
The supply curve:
The supply of potatoes (monthly)
a 20 50 100
b 40 70 200
c 60 100 350
d 80 120 530
A
Supply
C
Price (cents per g)
C
Price (cents per g)
C
Price (cents per g)
a 20 50 100
b 40 70 200
c 60 100 350
d 80 120 530
Supply
P Q
a 20 100
Price (pence per kg)
Supply
P Q
a 20 100
Price (pence per kg)
b 40 200
Supply
P Q
a 20 100
Price (pence per kg)
b 40 200
c c 60 350
Supply
d P Q
a 20 100
Price (pence per kg)
b 40 200
c c 60 350
d 80 530
b 40 200
c c 60 350
d 80 530
e 100 700
b
Objective 4
Identify firm and
industrial supply
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
TYPES OF SUPPLY
(2)Market Supply
Sum of the individual supply schedules in the
marketplace.
(EQ) Explain, with the aid of labelled
diagrams, the relationship between individual
(firm) supply and market supply.
(EQ) Explain, with the aid of labelled
diagrams, the relationship between individual
(firm) supply and market supply.
CHAPTER 3
Objective 5 & 6
Calculate supply
function
Discuss factors
influencing supply
Prepared by: Fernando
Quijano and Yvonn Quijano
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Factors effecting the supply of a
good
The Supply Function Sy = f ( Py, Pr, C,
Tch, Tx, N, U)
The Supply Function
Sy = f ( Py, Pr, C, Tch, Tx, N, U)
Py = Price of Good Y
Pr = Price of related goods
C = Cost of Production
Tch = State of Technology
Tx Taxation / Subsidy
N number of sellers in the industry
U = Factors outside the control of the firm
Supply of a good depends on its own price
(Causes a movement along supply curve)
P2
P1
Q1 Q2 Quantity Supplied
Supply of a good depends on prices of related goods
S1
S2
S1 S2
S1
S2
S1 S2
S1
S2
S1 S2
S1 S2
Favourable or unfavourable
unplanned factors:
Weather conditions e.g. floods or sunshine
Strikes
Shortage of raw materials
Transport failure
7. Supply of a good depends on factors outside the
control of a firm
S1 S2
S2 S1
To summarize
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Outline FOUR factors, other than price, which
affect the supply curve of an individual firm.
In each case explain how the factor affects
the supply curve.
Outline FOUR factors, other than price, which
affect the supply curve of an individual firm.
In each case explain how the factor affects
the supply curve.
When price changes,
what happens?
The curve does not shift -
there is a change in the
quantity supplied
A change in price
P
Rs20
causes a change
in the quantity
Supply Curve
A
supplied
Rs15
Rs10
B
C
Rs5
10 20 30 40 Q
Increase in
Quantity
Supplied
Increase in
Price
When something changes
other than price, what
happens?
The whole curve shifts
there is a change in supply
When the ceteris paribus
P assumption is relaxed, the
whole curve can shift
Rs20
S1 S2
Rs15
Rs10
Rs5
10 20 30 40 Q
Increase
in supply
Change in
nonprice
determinant
CHAPTER 3
Objective 7
Compare between
movement along the
supply curve and shift in
the supply curve
Prepared by: Fernando
Quijano and Yvonn Quijano
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
IMPORTANT
Copyright2004 South-Western
A Change in Supply Versus
a Change in Quantity Supplied
A change in supply is
not the same as a
change in quantity
supplied.
In this example, a higher
price causes higher
quantity supplied, and
a move along the
demand curve.
In this example, changes in determinants of supply, other
than price, cause an increase in supply, or a shift of the
entire supply curve, from SA to SB.
A Change in Supply Versus
a Change in Quantity Supplied
To summarize:
Change in price of a good or service
leads to
Change in supply
(Shift of curve).
CHAPTER 3
Objective 8
Explain exceptional
supply curve or or
abnormal supply curve
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
1. Exceptions of a fall in price