Supply: - A Particular Price For The Good - All Other Constraints On The Firm

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Supply

• A firm’s 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
– We’ll assume that all other influences on supply are held constant, so
we can explore the relationship between price and quantity supplied

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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

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The Supply Schedule and The Supply
Curve
• Supply schedule—shows quantities of a good
or service firms would choose to produce and
sell at different prices, with all other variables
held constant
• Supply curve—graphical depiction of a supply
schedule
– Shows quantity of a good or service supplied at
various prices, with all other variables held
constant
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The Supply Curve
Price per When the price is Rs.2.00
Bottle per bottle, 40,000 bottles
S
are supplied (point F).

Rs.4.00 G

At Rs.4.00 per bottle,


2.00 F quantity supplied is
60,000 bottles (point G).

40,000 60,000 Number of Bottles


per Month

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Shifts vs. Movements Along the Supply
Curve
• A change in the price of a good causes a movement
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 supply—except for the
good’s price—causes the supply curve to shift

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A Shift of The Supply Curve

Price per A decrease in transportation


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

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 changes—shifts 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)

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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 S
us rightward along
supply curve

P2

P1
Price increase moves
us leftward along
P3 supply curve

Q3 Q1 Q2 Quantity
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Changes in Supply and in Quantity
Supplied
Price Entire supply curve shifts S1
rightward when: S2
• price of input ↓
• price of alternate good ↓
• number of firms ↑
• expected price ↑
• technological advance
• favorable weather

Quantity
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Changes in Supply and in Quantity
Supplied
Price
Entire supply curve shifts S2
rightward when: S1
• price of input ↑
• price of alternate good ↑
• number of firms ↓
• expected price ↑
• unfavorable weather

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 2. causes the price 3. shrinking the


Bottle to rise . . . excess demand . . .

E
4. until price reaches its
Rs.3.00
equilibrium value of Rs.3.00
.
H
1.00 J
Excess Demand
D
25,000 50,000 75,000 Number of Bottles
1. At a price of Rs.1.00 per
per Month
bottle an excess demand
of 50,000 bottles . . .
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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

1. At a price of Rs. 5.00 per


Price per bottle an excess supply of
Bottle 30,000 bottles . . .

Excess Supply at Rs. 5.00 S 3. shrinking the


excess supply . . .
Rs.5.00 L
K
2. causes the
price to drop, E
3.00 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
, where is quantityD
Q D
 140  10 P Q
demanded, P is the price of the good. Supply
is given by where S is quantity
supplied. s Q  80  5 P
Q
• 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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4. Equilibrium 3. to a new
Price per price equilibrium.
Bottle increases
2. moves us along
S the supply
curve . . .

Rs. 4.00 F'


1. An increase in
E demand . . .
3.00

D2

D1

50,000 60,000 Number of Bottles of


5. and equilibrium quantity Maple Syrup per Period
increases too.
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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 quantity—but not both
– Direction of the other will depend on which curve shifts by
more

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