Supply and its Determinants

Supply  Just like with demand, we are going to start with thinking about markets…like the Product and Factor Markets from last chapter.  In any market, the Sellers are the Suppliers.  Supply – The willingness and the ability to produce (or service or resource) and sell a product at a range of prices.  Law of Supply – Producers are willing to sell more or something at a higher price.  Basically, it’s the opposite of the Law of Demand. As prices increase, quantity supplied will increase. And as prices decrease, the quantity supplied will decrease. P ↑, Q↑ or P↓, Q↓

Let’s try to show this on the board… Selling Cans of Soda  $.25  $.35  $.45  $.55  $.65  $.75  $.85  and on… Hauling Bricks  $8/hour  $10/hour  $12/hour  $14/hour  $16/hour  $18/hour  $20/hour  and on…

It should look something like this… S

Changes in Supply  Again, it is important to understand that a change in price, only changes the quantity supplied. It does not change the supply itself.  This is called a shift along the supply curve.

Factors that Shift Supply Supply Resource Prices Technology And Productivity Expectations Of Producers Number Of Producers Government Actions

Price of Inputs (Resource Prices)  When costs go up, profits go down, so that the willingness to supply also goes down.  Think about selling cans of coke. The input price is how much you originally get the coke for. If the whole sale price went up to $.45, how would that change the supply chart?

Technology/Labor Productivity  Advances in technology and labor productivity reduce the number of inputs needed to produce a given supply of goods.  Costs go down, profits go up, leading to increased supply.  Think about hauling bricks. If you owned a robot, how would that change the chart?

Expectations  If suppliers expect prices to rise in the future, they may store today's supply to reap higher profits later.

Number of Suppliers  As more people decide to supply a good the market supply increases.

Taxes and Subsidies  When taxes (like on cigarettes) go up, costs go up, and profits go down, leading suppliers to reduce output.  When government subsidies (when the government helps you out, like farmers with corn) go up, costs go down, and profits go up, leading suppliers to increase output.

Decrease in Supply

Increase in Supply

Change in Supply vs. a Change in the Quantity Supplied

So in summary…  Supply means how much people will sell of something at any given price.  A change in price will change the quantity supplied, but not the supply curve itself. This is a shift along the supply curve.  There are some things that will cause a shift in the supply curve such as…  Price of Inputs (Resources)  Technology/Labor Productivity  Expectations of Suppliers  Number of Suppliers  Government Action

So now let’s practice.

 John owns a factory making blue jeans. Originally he planned on paying his workers $10 an hour. But then he realized that wasn’t enough to hire the level of skill that he needed. He realizes that he will need to pay them at least $15 an hour. What will happen to his supply curve?

 It will shift to the left (decrease). To produce the same quantity at any given level he will need to charge more.

Let’s say I own a record store where I buy and sell records. Think about the following scenarios.  a) Another record store opens down the street that also buys used records. Now I have to pay more for the used records before I can sell them again.  b) The landlord now includes utilities in my rent payment, so I no longer have to pay for electricity.  a) My supply curve will shift left. Since I have to pay more for each record, I make less profit on every sale. This means that for any given price, I will be willing to sell fewer records.  b) My supply curve will shift to the right. Since I no longer have to pay for electricity, my costs are lower. So now I am willing to sell more records at any given price.

 The government offers corn farmers a $1 subsidy for every pound of corn sold. Instead of making $2 per pound, they now make $3. What will happen to the market supply curve?  It will increase (shift right) because I now have an incentive to supply more.

More Supply Practice YOU WILL NEED EITHER A SHEET OF PAPER OR A WHITE BOARD

1. A software company invests in a set of fast, new computers that allow employees to test their new programs easily and quickly. WHICH FACTOR IS THIS AND HOW WILL IT AFFECT SUPPLY?

2. A farmer is deciding how much tobacco and corn to grow on the farm. Congress recently cut the subsidies that it pays farmers to grow tobacco. WHICH FACTOR IS THIS AND HOW WILL IT AFFECT HIS TOBACCO?

3. You own a company that makes wires. The price of copper wire has recently gone up. WHICH FACTOR IS THIS AND HOW WILL IT AFFECT SUPPLY?

4. A tool-making company hires several workers who got degrees from a technical school, where they learned manufacturing techniques. WHICH FACTOR IS THIS AND HOW WILL IT AFFECT SUPPLY?

5. A pancake restaurant is successful in a downtown mall. Another pancake restaurant opens up in a building across from the mall parking lot. WHICH FACTOR IS THIS AND HOW WILL IT AFFECT SUPPLY?

Now, let’s take a quiz. Please put everything away. MAKE SURE TO ASK QUESTIONS NOW, IF YOU HAVE THEM.