3.3 Supply Shifters Lecture

Concepts of Supply

• Ceteris Paribus: A Latin phrase meaning "all else equal", used to analyze the relationship between price and quantity supplied while ignoring other influencing factors.

Change in Quantity Supplied

• Changes in quantity supplied occur solely when the price of the good changes.

  • If the price of pizza increases, the quantity supplied will increase, moving along the same supply curve.

  • Conversely, if the price decreases, the quantity supplied will decrease.

Change in Supply

• A change in supply occurs when factors other than the price of the good change, leading to a shift in the entire supply curve.

• The difference between a change in quantity supplied and a change in supply is crucial for understanding market dynamics.

Factors Shifting the Supply Curve

• Changes that shift the supply curve can be categorized into five factors:

  1. Input Prices

     • Increase in input prices (like flour or wages) raises marginal costs, causing the supply curve to shift left (decrease in supply).

     • Decrease in input prices lowers costs, shifting the supply curve right (increase in supply).

  2. Productivity

     • Improvements in productivity (e.g., technological advancements) lower production costs, shifting the supply curve to the right (increase in supply).

     • Decreased productivity raises costs, shifting supply left (decrease in supply).

  3. Prices of Related Goods

     • Substitutes in Production: If the price of a substitute in production rises, suppliers will produce less of the original good, shifting supply left.

     • If the price of a substitute falls, more of the original good will be supplied, shifting supply right.

     • Complements in Production: Higher prices for complements in production lead to an increase in supply of both goods (e.g., if the price of leather increases, beef supply also increases).

  4. Size of the Market

     • An increase in the number of firms in a market raises the quantity supplied at each price, shifting the supply curve right.

     • Conversely, if firms exit the market, supply decreases, shifting the supply curve left.

  5. Expectations About the Future

     • Expectations of higher future prices lead suppliers to withhold supply today, shifting the supply curve left.

     • Conversely, expectations of lower future prices encourage suppliers to increase present supply, shifting the supply curve right.

Conclusion

• Understanding these shifts is crucial for analyzing seller behavior and market dynamics.

• Use intuitive reasoning: when external factors change, consider how they affect the willingness of sellers to provide goods at various prices.