Supply: - A Particular Price For The Good - All Other Constraints On The Firm
Supply: - A Particular Price For The Good - All Other Constraints On The Firm
Supply: - A Particular Price For The Good - All Other Constraints On The Firm
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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
2
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
3
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
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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
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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
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
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 . . .
D2
D1
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