1. Supply

2. S = f (………………………………………………………………)
Study the decision making mechanisms and behavior of the FIRMS (producers)
firms produce the goods and services in the product market
They also hire and purchase the factor of resources to produce the goods and services (in the factor or resource market e.g. labor market, raw materials)
S = f (………………………………………………………………)

3. But too complex and so ASSUME
Supply shows the quantities of a good (or service) a firm is willing and able to produce at different prices, during a particular period of time, ceteris paribus
As in the case of demand, we only look at price as a factor that influences how much the firm supplies in the market, all the other things are assumed to be held constant (ceteris paribus)

4. In order to model supply mathematically…
a firm’s or market’s supply of a good can be presented as a supply schedule or a table showing the various quantities of a good the firm is willing and able to produce and supply at various prices
Here is an example for the chocolate bars

5. The Supply Curve
To visualize this data more clearly, we can simply graph it (sometimes the S curve will be labelled MC or MSC = Marginal (Social) Cost)

6. Why does the supply curve have positive and upward slope?
Two main reasons :
1) Incentives for profits: higher prices generally mean that the firm’s profits* increase, and so the firm faces an incentive to produce more of that good (and vice versa)
eg. If deciding between producing tomatoes and egg-plants OR between i-pads and i-phones
* Profits (π) = Revenue - Costs
+ 2) (to be done later) Law of Diminishing Returns and Increasing Costs

7. Graphing a Supply Curve
Page 3 of H/O and “first D and S.grf”
Qs = P
Assumes Supply function is
………………………….
General form
Qs = c + dP
Where
c =……………………..
d= …………………….
= Δ Qs_ ΔP
measures…………………..
Since the d has a positive sign, the relationship between Qd and P is positively related

8. Graphical interpretation
Distinguish between the movement along the supply curve and shifts of the entire supply curve
Movement along the supply curve occurs only as a result of changes in ………. This movement along the supply curve is called a change in quantity supplied
Shift of the entire supply curve to the right (increase) or left (decrease) occur as a result of a change in other determinants. This shift is called a change in supply

10. Caveat and Important Note
The “c” intercept can possibly be negative.
Algebraically, in these cases, you calculate the new P intercept by setting Q = 0
This represents the beginning of the supply curve for which Qs has positive values

11. What would change the parameter “d” or gradient?
Use the economist’s definition of gradient Δ Qs_ ΔP
change P by 1 unit and see how Qs changes
The slope is the degree of sensitivity of production to price changes
Increase in “d” the supply curve becomes ……….

12. Causes of a CHANGE in Supply (……………….. of the supply curve)
Factors of production and their COSTS : If the cost (wage, rent, interest) increases, then less profitable (for any price) and thus produce less (and vice versa for a decrease in costs)
e.g reasons why companies go to China, Vietnam, Bangladesh, etc.
Technology and Productivity (output per unit of input): a new improved technology lowers the cost of production (ie cost per unit of output)
e.g. automation (no need for labor), the internet and s (vs. faxes and phone calls), S curve shifts right (increase in supply)

13. (continued) 3) Government intervention 4) The number of firms
Taxes (consumption tax or corporate/profit tax): Taxes are effectively an increase in the cost of production. Companies must provide extra funds to the government from their revenue/profits.
Subsidies: is a payment made to the firm by the government, and so has the opposite effect of a tax and equivalent to a fall in cost of production. e.g. usually with social benefits e.g. solar energy or energy saving light bulbs.
4) The number of firms
5) Shocks or sudden unpredictable events or seasonal changes e.g. natural disasters, weather, war, oil spill, etc.

14. (continued) 1) changes in costs 2) changes in tech. and productivity
3) Govt 4) Number of firms 5) Shocks, seasons, weather etc etc
6) Price of related goods. Two types:
Competitive supply – refers to the production of one or the other by a firm; the good must compete for the same resources e.g. farmer to grow wheat or corn. If the price of wheat increases, farmer will switch to wheat and produce less corn
Joint supply – refers to production of goods that are derived from a single product, so that it is not possible to produce more of one without producing more of the other e.g rice and tatami mats. An increase in the price of one leads to an increase in its quantity supplied and also the other joint product
7) Producers ‘expectations: If firms expect the price of their product to rise, they may withhold some of their current supply from the market (not offer to sell) with the expectation that they will be able sell it at higher prices in the future, this leads to a fall in supply in the present, (vice versa for the long run) e.g. often practiced with technology and manufacturing companies.

15. To Sum …