1. 1 Objectives:  Understand the difference between supply and quantity supplied.  Define the “Law of Supply” and explain why the supply curve is usually upward sloping.  Understand the difference between a change in supply and a change in quantity supplied.  Understand what causes the supply curve to shift  Understand what causes the supply curve to shift. Module 3: Market Mechanism - Supply

2. 2 supply curve  A supply curve shows the quantities supplied by a producer at various prices. Understand the difference between supply and quantity supplied. Objective 1 Price per cup ($) Quantity Supplied (cups of coffee) $0.500 1.001 1.502 2.003 2.504 3.005 3.506 4.007 4.508 5.009 Chris’ Supply ScheduleChris’ Supply Curve price quantity supplied The supply curve shows the relationship between the price of a product and the quantity supplied of that product.

3. 3 Quantity supplied particular  Quantity supplied is the quantity of a product that a firm is willing and able to supply at a particular price. Quantity supplied  Quantity supplied refers to a point on the supply curve. If the price of coffee is $3, Chris is willing to supply 5 cups of coffee. (point “l”). If the price rises to $4, Chris is willing to supply 7 cups of coffee (point “n”). Objective 1:…..supply and quantity supplied…. Quantity supplied

4. 4 Chris’ Supply Schedule Price per cup ($) Quantity Supplied (cups of coffee) $0.500 1.001 1.502 2.003 2.504 3.005 3.506 4.007 4.508 5.009 Chris’ Supply Curve price quantity supplied The supply curve shows the relationship between the price of a product and the quantity supplied of that product.

5. 5 Objective 1:…..supply and quantity supplied….  Supply versus Quantity Supplied: Supply refers to the entire curve while quantity supplied is associated with a point on the curve.

6. 6 Law of Supply  The Law of Supply states that holding everything else constant, an increase in the price of a product causes an increase in the quantity supplied and a decrease in the price of a product causes a decrease in the quantity supplied. Define the “Law of Supply” and explain why the supply curve is usually upward sloping. Objective 2

7. 7  Two factors explain the Law of Supply: Profit motive: 1. Profit motive: A higher market price, holding all else constant induces suppliers to increase quantity supplied because profit margins increase. The law of Increasing Opportunity Cost: 2. The law of Increasing Opportunity Cost: As more and more is produced, resources must be drawn away from alternative uses, bidding up the opportunity cost. Thus, producers require higher prices to supply more of a product. Objective 2: …… and explain why the supply curve is usually upward sloping.

8. 8 Understand the difference between a change in quantity supplied and a change in supply.  A change in quantity supplied refers to a movement along a supply curve in response to a change in the price of the product. Objective 3 Quantity supplied changes when price changes

9. 9 change in supply  A change in supply is shown as a shift of the entire supply curve. In other words, at every price, quantity supplied has now changed. change in supplynot  A change in supply is not caused by a change in price. change in supply  A change in supply is caused by a change in factors other than the price of the good in question. Objective 3: ….a change in quantity supplied and a change in supply.

10. 10 Initially at a price of $2.50, Chris was willing to supply 4 cups of coffee but now at the same price he is willing to supply 3 cups of coffee (from “k” to “v”). decrease in supplyleftward shift  An decrease in supply is represented by a leftward shift of the supply curve. Objective 3 ……..a change in supply

11. 11 Initially at a price of $1.00, Chris was willing to supply 1 cup of coffee but now at the same price he is willing to supply 3 cups of coffee (from “g” to “r”). increase in supplyrightward shift  An increase in supply is represented by a rightward shift of the supply curve. Objective 3 ……..a change in supply

12. 12 Objective 4 Understand what causes the supply curve to shift 1. Price of the good 2. Prices of inputs such as wages 3. Technological change 4. Prices of substitutes in production (rival goods) 5. Price of complements in production (jointly produced goods) 6. Number of firms in the market 7. Expectations of suppliers about future prices 8. Government policies that affect production Determinants of Supply include:

13. 13  A change in any determinant other than the price of the good in question causes a shift of the supply curve.  Along a supply curve, only price and quantity supplied change; all other determinants are held constant. Objective 4:… what causes the supply curve to shift

14. 14 Objective 4: …examples of supply shifters Example 1: The United Auto Workers (UAW) has successfully negotiated higher wages. What happens in the auto industry? Do not confuse wages (supply determinant) with income (demand determinant). An increase in wages increase the cost of production. The supply curve shifts left.

15. 15 Example 2: Example 2: Suppose suppliers of silver expect the price of silver to fall next month. How does this affect the supply of silver today?  Today, supply increases in anticipation of lower prices in the future. S 1 : Today’s supply curve with a new set of expectations about price S 0 : Today’s demand curve with some given set of expectations about price Today’s price Change in producers’ expectations about future prices The Supply of Silver

16. 16 A decrease in the price of soybean will decrease the quantity supplied of soybean. This is depicted by a movement along the supply curve for soybean. Farmers now allocate more land toward producing corn. The supply curve for corn shifts right. decreaseincrease rivals in production  A decrease in the price of soybeans leads to an increase in the supply of corn, given that soybean and corn are rivals in production. Change in the price of a rival good

17. 17 Example 3: Example 3: Land is used to grow soybean and corn. What happens to the supply of corn following a decrease in the price of soybeans? substitutes in production or rival goods  Soybeans and corn are substitutes in production or rival goods. common input  When two goods are rivals in production, they must share at least one common input. In this example, land is the common input and soybean and corn are rivals in production. Change in the price of a rival (in production) good

18. 18 decrease in the price of good S increase in the supply of good C  Two goods S and C are rivals (or substitutes) in production if a decrease in the price of good S leads to an increase in the supply of good C or if an increase in the price of good S leads to an decrease in the supply of good C. negative  A negative relationship exists between the price of good S and the supply of good C Do Not Confuse substitutes in consumption with rivals in production (also called “substitutes in production”). Definition of Rivals in Production