Supply and Producer Choice

Overview of Supply Shifters

Last Discussion Points

  • Recap of previous discussion regarding:

    • Productivity and technology

    • Relationship between technology, productivity, and supply

Technology and Productivity

  • Increasing technology enhances productivity and efficiency, subsequently increasing overall supply.

  • Example: Maya's sewing business:

    • Initially sewing dresses by hand (limited output).

    • After acquiring a sewing machine:

    • Allows for increased production without a change in price.

    • Result: Supply must adjust to account for increased production at unchanged prices.

Major Shifters of Supply

1. Related Outputs

  • Suppliers typically produce multiple goods, influencing supply shifts.

  • Complementary and Substitute Goods from the Supplier's Perspective:

    • Terms used:

    • Complement Introduction: Goods produced together.

    • Substitute Introduction: Alternative uses of the same resources.

Complementary Goods in Supply

  • If the price of one good rises, the supply of its complement also increases.

  • Example:

    • Asphalt produced as a byproduct of oil refining.

    • Producing oil increases asphalt output due to the nature of production.

    • Other examples:

    • Beef and leather (cow slaughter results in both).

    • Donuts and donut holes (donut holes can't exist without donuts).

Substitute Goods in Supply

  • If the price of a substitute rises, the supply of the original good decreases.

  • Example:

    • Farmer choosing between corn and soybeans:

    • If soybean prices increase, the farmer produces more soybeans and less corn.

    • Conversely, if soybean prices decrease, more corn will be produced as resources are diverted.

  • Additional Example:

    • Factory deciding between making SUVs or sedans; if SUV prices rise, the supply of sedans decreases as resources reallocate.

2. Expectations of Future Prices

  • Supplier expectations about future prices affect current supply:

    • If suppliers expect higher prices next year, they will limit current supply to sell at future prices.

    • Example:

    • Stanley anticipates demand for neon green water bottles will rise.

    • Current supply is decreased as some units are saved for future sales at higher prices.

    • Important to differentiate between:

    • Current supply decrease vs future supply increase.

3. Number of Sellers in the Market

  • Increasing number of sellers in a market leads to more overall supply:

    • New entrants increase quantity supplied at all price levels, shifting the supply curve outward.

    • Example:

    • Chick fil A enters a competitive market (e.g., Grand River).

    • New suppliers mean an overall increase in chicken supply, shifting the supply curve to the right.

Key Takeaways on Supply Shifts

  • Increase in Supply:

    • Shift of the supply curve to the right (outward).

    • Results in a greater quantity supplied at every price level.

  • Decrease in Supply:

    • Shift of the supply curve to the left (inward).

    • Results in a decreased quantity supplied at every price level.

Shifts vs. Movements Along the Supply Curve

  • Movement Along the Supply Curve:

    • Occurs only when there is a change in the price of the good itself.

    • Does not indicate a change in supply; rather, it denotes how quantity supplied reacts to price changes.

  • Shift in the Supply Curve:

    • Caused by changes in external factors (e.g., number of sellers, expectations, related outputs).

    • Results in a change in supply behavior at various price points.

Conclusion

  • Understanding shifts vs movements in the supply curve is crucial for analyzing market behavior. The supply curve reflects quantity at different prices while shifts result from factors beyond mere price changes.