Supply

Law of Supply & Non-Price Determinants

Learning Outcomes
Define Law of Supply
Distinguish between movement along and
shift of Supply curve
Explain how the non-price determinants
affect the Supply Curve
Construct diagrams to illustrate the
difference between a movement along and
shift of the Supply curve
Supply
Supply:
Quantity of a good or service that producers
are willing and able to offer at a given price
during a specific time period.
Law of Supply
There is a direct relationship between Price and
Quantity Supplied for Producers.
Price increases - Quantity Supplied Increases
Price decreases - Quantity Supplied Decreases
Supply Curve
Profit Incentive: Ceteris Paribus, a firm would
prefer to sell a good or service at a higher price
rather than a lower price because that will increase
profits.
http://www2.yk.psu.edu/~dxl31/econ4/coffee_supply_curve.png
Price Quantity Supplied
1 6
2 9
3 12
4 15
5 18
Shifts & Movements along the curve
Movement alongchange in
Price.
Increase in Price .20 to .50 results
in Increase in Quantity Supplied
from 100 to 400 units.
Shift of Supply Curve.Non-Price
Determinants
S1 - S2 : Increase in Supply. Price constant..
S1 - S3 : Decrease in Supply. Price constant
Non-Price Determinants of Supply
Include:
Cost of Factors of Production
Producer Expectation
Government Intervention
Number of Firms
Supply Shocks
Cost of Factors of Production
An increase in the Cost of Production for a
firm will lead to a Decrease in Supply (left
shift).
A decrease in the Cost of Production for a
firm will lead to an Increase in Supply
(right shift).
Inverse Relationship between Cost of
Production & Supply
http://cdn.romeconomics.com/wp-
content/uploads/2012/10/factors_of_production.jpg?50ff81
Producer (Firm)
Expectation
Producer expects the
price of his good to rise,
he may withhold it from
the market with the hope
to sell it in the future at a
higher price.
Decrease in Supply (left
shift) now.
Number of Firms
Increase in the number
of firms.
Increase in Supply
(right shift)
The reasoning follow
that market supply is
the sum of all individual
supply. Direct
relationship.
Taxes
Taxes are treated as
an Increase in the Cost
of Production.
Decrease Supply
(left shift)
Subsidy
Subsidy: Payment by the
government to the firm.
Opposite of a tax in that it
decreases the Cost of
Production.
Increase Supply (right shift)
Supply Shocks
Sudden unpredictable
events such as:
Natural disasters
Weather conditions
War
Negative Supply Shocks
Decrease Supply (left shift)