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CHAPTER 3

DPB 1023
MICROECONOMICS
CHAPTER 2
SUPPLY THEORY
(Week 2)

Prepared by: Fernando


Quijano and Yvonn Quijano

2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
CHAPTER 3

Objective 1
Define supply

Prepared by: Fernando


Quijano and Yvonn Quijano

2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
DEFINITION OF SUPPLY

The quantity of a good that firms


are willing to make available
over a particular period of time
The supplier determines the level
of output it is willing to supply at
the prevailing market price
CHAPTER 3

Objective 2
Define law of supply

Prepared by: Fernando


Quijano and Yvonn Quijano

2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Law of Supply

6 The law of supply


Price of soybeans per bushel ($)

5 states that there is a


4 direct relationship
3
between price and
2
1
quantity of a good
0 supplied.
0 10 20 30 40 50 This means that
Thousands of bushels of soybeans

As price goes up, the quantity


produced per year
supply curves
supplied will go up. typically have a
As price goes down, the quantity positive slope.
supplied will go down.
P
Increase in Supply
Sx S1

Increase

Q
Increase/Decrease
P
in Supply
S2 SX S1

Decrease Increase

Q
CHAPTER 3

Objective 3
Sketch supply curve

Prepared by: Fernando


Quijano and Yvonn Quijano

2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Supply in Output Markets

CLARENCE BROWN'S A supply schedule is a table


SUPPLY SCHEDULE showing how much of a product
FOR SOYBEANS
firms will supply at different
QUANTITY
SUPPLIED prices.
PRICE (THOUSANDS
(PER OF BUSHELS Quantity supplied represents the
BUSHEL) PER YEAR)
$ 2 0 number of units of a product that
1.75
2.25
10
20
a firm would be willing and able to
3.00 30 offer for sale at a particular price
4.00
5.00
45
45
during a given time period.
The Supply Curve and
the Supply Schedule
A supply curve is a graph illustrating how much
of a product a firm will supply at different prices,
holding constant other factors.
CLARENCE BROWN'S 6

Price of soybeans per bushel ($)


SUPPLY SCHEDULE
FOR SOYBEANS 5
QUANTITY
SUPPLIED
4
PRICE (THOUSANDS
(PER OF BUSHELS
3
BUSHEL) PER YEAR) 2
$ 2 0
1.75 10 1
2.25 20
3.00 30 0
4.00 45
5.00 45 0 10 20 30 40 50
Thousands of bushels of soybeans
produced per year
Bens Supply Schedule
Bens Supply Schedule and Supply Curve

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)

Price of Farmer X's Total Market


potatoes supply supply
(pence per kg) (tonnes) (tonnes: 000s)

a 20 50 100

b 40 70 200

c 60 100 350

d 80 120 530

e 100 130 700


P Q
A 20 100
Price (cents per g)

A
Supply

Quantity (kgs: 000s)


P Q
A 20 100
B 40 200
Price (cents per g)

Quantity (kgs: 000s)


P Q
A 20 100
B 40 200
C 60 350

C
Price (cents per g)

Quantity (kgs: 000s)


P Q
A 20 100
B 40 200
C 60 350
D
D 80 530

C
Price (cents per g)

Quantity (kgs: 000s)


E P Q
A 20 100
B 40 200
C 60 350
D
D 80 530
E 100 700

C
Price (cents per g)

Quantity (kgs: 000s)


The supply curve:
The supply of potatoes (monthly)

Price of Farmer X's Total Market


potatoes supply supply
(pence per kg) (tonnes) (tonnes: 000s)

a 20 50 100

b 40 70 200

c 60 100 350

d 80 120 530

e 100 130 700


Market supply of potatoes (monthly)

Supply
P Q
a 20 100
Price (pence per kg)

Quantity (tonnes: 000s)


Market supply of potatoes (monthly)

Supply
P Q
a 20 100
Price (pence per kg)

b 40 200

Quantity (tonnes: 000s)


Market supply of potatoes (monthly)

Supply
P Q
a 20 100
Price (pence per kg)

b 40 200
c c 60 350

Quantity (tonnes: 000s)


Market supply of potatoes (monthly)

Supply
d P Q
a 20 100
Price (pence per kg)

b 40 200
c c 60 350
d 80 530

Quantity (tonnes: 000s)


Market supply of potatoes (monthly)
e
Supply
d P Q
a 20 100
Price (pence per kg)

b 40 200
c c 60 350
d 80 530
e 100 700
b

Quantity (tonnes: 000s)


SUPPLY CURVE

Relationship between supply and price


short-run supply
long-run supply
The supply curve
assumptions
other things remain equal (ceteris paribus)
a given time period
the axes
individual's and market supply curves
why supply curves generally slope up
Why do supply curves
have a positive slope?
Only at a higher price will it
be profitable for sellers to
incur the higher opportunity
cost associated with
supplying a larger quantity
CHAPTER 3

Objective 4
Identify firm and
industrial supply

Prepared by: Fernando


Quijano and Yvonn Quijano

2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
TYPES OF SUPPLY

(1) Firm Supply


Quantities offered for sale at various prices at a given
time by an individual seller.

(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)

If price rises quantity supplied rises


If price falls quantity supplied falls

P2

P1

Q1 Q2 Quantity Supplied
Supply of a good depends on prices of related goods

S1
S2

S1 S2

An increase in price of a related good An fall in price of a related


will cause a fall in the supply of Good good will cause an increase
Y in the supply of Good Y
Supply of a good depends on the cost of
production

Causes of an increase in the cost of production:


A rise in labour costs
A rise in the cost of raw materials
An increase in taxes
A reduction in subsidies

Causes of a decrease in the cost of production:


A fall in labour costs
A fall in the cost of raw materials
A reduction in taxes
An increase in subsidies
Supply of a good depends on cost of production

S1
S2

S1 S2

An increase in the cost of production An fall in the cost of


will cause a fall in the supply of Good production will cause an
Y increase in the supply of
Good Y
Supply of a good depends on the state of technology

S1

S2

We do not generally discuss


a fall in technology we
assume any new method of
production is an option for a
firm

An improvement in the state


of technology will cause an
increase in the supply of
Good Y
Supply of a good depends on the
rates of taxation / granting of
subsidies

A reduction in taxes will result in a


reduction in the cost of raw materials /
production and supply will increase.

An increase in subsidies granted to a


firm for raw materials / labour employed
will result in a reduction in costs and
supply will increase
Supply of a good depends on the
rates of taxation / granting of
subsidies S1
S2

S1 S2

An increase in the level of taxation / An fall in the level of


decrease in subsidies will cause a fall in taxation / increase in
the supply of Good Y subsidies will cause an
increase in the supply of
Good Y
6. Supply of a good depends on
the number of sellers in the
industry

If the number of sellers in the industry


decrease (due to rationalisation) than
overall quantity supplied will also
decrease

If the number of sellers in the industry


increase than overall quantity supplied
will also increase
6. Supply of a good depends on
the number of sellers in the
industry
S2 S1

S1 S2

A decrease in the number of sellers in An increase in the number of sellers in


industry will cause a fall in the supply industry will cause a rise in the supply
of Good Y of Good Y
7. Supply of a good depends on factors outside
the control of a firm / unforseen circumstances

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

Favourable unplanned factors will Unfavourable unplanned


cause an increase in supply and a shift factors will cause a decrease
to the right in supply and a shift to the
left
CHAPTER 3

To summarize

Prepared by: Fernando


Quijano and Yvonn Quijano

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

KNOW THE DIFFERENCE


BETWEEN A CHANGE IN
THE QUANTITY SUPPLIED
AND A CHANGE IN SUPPLY
DIFFERENCE BETWEEN
CHANGE IN QUANTITY SUPPLIED
AND CHANGE IN SUPPLY

Change in quantity Change in supply


Supplied
1. Due to change in 1. Due to change in
price. other factors.
2. Movement along 2. Shift in supply
the supply curve. curve.
Table 2 Variables That Influence Sellers

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

When supply shifts


to the right, supply
increases. This
causes quantity
supplied to be
greater than it was
prior to the shift, for
each and every price
level.
A Change in Supply Versus
a Change in Quantity Supplied

To summarize:
Change in price of a good or service
leads to

Change in quantity supplied


(Movement along the curve).

Change in costs, input prices, technology, or prices of


related goods and services
leads to

Change in supply
(Shift of curve).
CHAPTER 3
Objective 8
Explain exceptional
supply curve or or
abnormal supply curve

Prepared by: Fernando


Quijano and Yvonn Quijano

2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
1. Exceptions of a fall in price

If the firms anticipate that the price of


the product will fall further in future, in
order to clear their stocks they may
dispose it off at a price that is even
lower than the current market price.
2. Sellers who are in need of cash

If the seller is in need of hard cash, he


may sell his product at a price which may
even be below the market price.
3. When leaving the industry

If the firms want to shut down or close


down their business, they may sell their
products at a price below their average
cost of production.
4. Agricultural output

In agricultural production, natural and


seasonal factors play a dominant role.
Due to the influence of these constraints
supply may not be responsive to price
changes.
5. Backward sloping supply curve of
labor

The rise in the price of a good or service sometimes


leads to a fall in its supply. The best example is the
supply of labor. A higher wage rate enables the worker
to maintain his existing material standard of living with
less work, and he may prefer extra leisure to more
wages. The supply curve in such a situation will be
backward sloping SS1 as illustrated in figure below:
At WN wage rate, the
supply of labor is ON. But
beyond NW wage rate the
worker will reduce rather
than increase his working
hours. At MW1 wage rate
the supply of labor is
reduced to OM.
Key Concepts cont.
What is the law of supply?
Why do supply curves have a positive slope?
When price changes, what happens?
When something changes other than price, what
happens?
What can cause a shift in a supply curve?

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