Individual Markets Supply: The Nature of Production
Supply • A schedule or curve that shows the amounts of a product that producers are willing and able to make available for sale at each of a series of possible prices during a set period. • This is very similar to our discussion of demand, but it will be the reverse relationship.
The Supply Schedule • On the rightis a supply schedule for Ice Cream Cones. • What is the difference between this, and the demand schedule we looked at?
The Law of Supply • The principle that, other things equal, an increase in the price of a product will increase the quantity of it supplied, and vice versa. • If the price of Pepsi rises, the Quantity Supplied of Pepsi increases because producers want to make more money. • The price of Pepsi declines, the Quantity Supplied decreases because the incentive to produce has declined.
Incentives • Incentives are very important in understanding economics. Firms and consumers respond to incentives. • Remember that price is a cost or outlay for consumers, but revenue or income for firms. • If a farmer can produce corn or wheat and corn prices go up, the Quantity Supplied of corn will rise because they will now make less wheat.
Rising Costs • Producers encounter increasing costs as they make more units. Marginal cost increases with the Law of Increasing Opportunity Cost. • Factories become crowded and less efficient as workers are added, firms need a higher price to compensate for supplying a higher quantity.
The Supply Curve • A curve illustrating the positive or direct relationship between Quantity Supplied and Price. Other things being equal of course. • How is this curve different than the demand curve we looked at? Why?
Price and Q.S. • When the price changes, we simply experience a change in Quantity Supplied, not in Supply, which is the complete schedule. We move along the curve, do not shift it.
Determinants of Supply • As with Demand, the Determinants of Supply are what causes the schedule or curve to change and shift , NOT the price. • The Determinants of Supply are: 1. Resource Prices (Input Prices) 2. Technology 3.Taxes and Subsidies 4.Prices of Other Goods 5.Price Expectations 6.The Number of Sellers in the Market
Increase/Decrease Increased Supply Decreased Supply
1. Resource Prices • For suppliers, resources are inputs, and inputs are costs of production. • Higher resource prices increase costs and, therefore, reduce the incentive for a firm to produce because their profit will be less if resource prices rise. • Oil Prices are an important resource or input for anything made of plastic, and thus cause supply to fluctuate for many goods.
2. Technology • Improvements in technology or the discovery of new techniques cause Supply to change or shift because firms can produce more goods with less resources. • Cellular technology has improved drastically over time, and thus the supply of cellular technology has increased, or shifted to the right. Think of an old Motorola versus a BlackBerry.
3. Taxes and Subsidies • Taxes are costs! They reduce incentives and shift supply curves to the left. Firms will produce less if there are higher taxes on a good or service. • Subsidies are the opposite. They are resources given to suppliers to incentivize them to supply more, and shift the curve to the right. • Farming and education are often subsidized.
4. Prices of Other Goods • Firms can often use their capital and other resources to produce different goods or services. • Substitution in Production is suppliers responding directly to incentives. If the price of orange soda is higher than purple, a factory owner might switch production to orange. (Remember, price is not cost). • This increase the supply of orange soda.
5. Price Expectations • More difficult to generalize for all firms. • A shareholder might not sell (reduce supply) a security today because he expects the price to be higher later. • However, a factory owner might hire workers and increase production (increase supply) of a good today because he expects the price to rise tomorrow.
6. Number of Sellers • Other things being equal, the more suppliers the more supply, and the curve shifts right. • This happened with many industries in North America. Especially in manufacturing. • Picture vinyl record manufacturers. As firms left the industry, supply declined and shifted to the left over time. However, conversely think of cell phone providers. The curve has shifted right.
Supply vs. Quantity Supplied • As with demand, the distinction between a change in Supply versus a change in Quantity Supplied (QS) is very important. • A supply change is a change in the QS at every price; a shift of the curve to the left (decrease) or the right (increase). • A change in QS is simply a movement from one point to another on a fixed curve.
Assignment Questions • Complete Questions 4 & 5 on Page 71.