Law of Supply Concepts

Consumers buy more of a good/service when prices are lower.

Law of Supply: Quantity supplied is directly related to price, ceteris paribus. This principle underscores the idea that, holding other factors constant, an increase in market price will lead to an increase in quantity supplied, while a decrease in price will result in a decrease in quantity supplied.

• If price decreases, quantity supplied decreases, as producers are less willing to spend resources to create products when they can obtain a higher price for fewer items.

• If price increases, quantity supplied increases, incentivizing producers to allocate more resources and increase production to take advantage of higher potential profits.

Higher prices incentivize producers to supply more, reflecting a fundamental profit motive where businesses aim to maximize returns on their investments and expenses.

Individual Supply Schedules and Market Supply

Market supply is the aggregate of individual supply schedules across different suppliers in the market. Individual supply schedules indicate how much of a good or service each supplier is willing to provide at various price levels.

Example from smartphone case suppliers:

• Lisa:

  • $10: 1 case

  • $15: 2 cases

  • $20: 3 cases

  • $25: 4 cases

• Roberta:

  • $10: 2 cases

  • $15: 4 cases

  • $20: 6 cases

  • $25: 8 cases

• Thelma:

  • $10: 0 cases

  • $15: 0 cases

  • $20: 0 cases

  • $25: 1 case

The total market supply at different prices is summarized as follows:

• At $10: 3 cases (combining individual supplies from Lisa, Roberta, and Thelma)

• At $25: 13 cases, illustrating how higher prices lead to greater overall market supply when considering all suppliers.

Graphing Supply

Graph Details:

• In standard economic supply graphs, price is plotted on the y-axis while quantity is plotted on the x-axis.

• Changes in price lead to changes in quantity supplied, which is represented by movement along the supply curve rather than a shift of the supply curve itself.

• An increase in price results in a higher quantity supplied, depicted as a rightward movement along the curve, while a decrease in price results in a lower quantity supplied, depicted as a leftward movement along the curve.

Understanding Supply Changes and Shifts

Quantity Supplied vs. Supply:

• A change in price causes a change in quantity supplied; it does not result in a shift of the supply curve itself. This distinction is important as it highlights the responsiveness of quantity supplied to price fluctuations.

Positive Correlation:

• As price increases, suppliers are motivated to produce more, indicated by rightward movement on the graph. Conversely, as price decreases, suppliers produce less, which shows leftward movement on the graph. This relationship illustrates the elasticity of supply relative to price changes.

Determinants of Supply (ROTTEN)

1. Resource:

   • When production costs increase, the supply shifts left (decreases). When production costs decrease, supply shifts right (increases).

   • Example: An increase in fracking availability lowers gasoline prices; conversely, severe frost can damage orchards, raising orange juice prices.

2. Other goods' prices:

   • Changes in the profitability of producing other goods can lead to supply shifts. If production shifts to more profitable goods, the supply of less profitable goods may shift left; whereas, if less profitable goods become the focus, the supply may shift right.

   • Example: An increase in demand for wine may lead to decreased avocado supply as producers switch production focus.

3. Taxes, Subsidies, and Government Regulation:

   • Subsidies can incentivize increased production, shifting supply right, while new taxes generally lead to a reduction in supply, shifting it left.

   • Example: If subsidies for the oil industry are reduced, gasoline prices may increase due to decreased supply.

4. Technology (Productivity):

   • Advances in technology often lower production costs, shifting supply right as companies can produce more at lower costs.

   • Example: The usage of machine harvesters and enhanced data collection techniques can decrease costs, thus increasing supply.

5. Expectations of the Producer:

   • Anticipated demand influences current supply levels. Producers adjust supply based on their expectations of future market conditions.

   • Example: Increasing the supply of candy canes before the holiday season illustrates anticipatory behavior based on expected demand.

6. Number of Firms in the Industry:

   • An increase in the number of firms in a market typically indicates an increase in overall supply (shift right), while a decrease in the number of firms can lead to decreased supply (shift left).

   • Example: The emergence of new electric car manufacturers expands supply, whereas the closure of music stores represents decreased supply within a dying industry.

Supply Curve Adjustments

• An increase in steel prices can lead to decreased car supply, causing a left shift in the supply curve, demonstrating how raw material costs influence market output.

• A rise in demand for digital photography has lowered film production costs, shifting that specific supply curve right as it reflects producers' adaptations to market demand changes.

• Seasonal demand expectations, for instance, the period after holidays (such as fireworks), can cause supply to decrease, historically reflected as a leftward shift in supply due to the predicted drop in consumer demand.

• The expiration of patents can lead to increased competition in a market, resulting in a rightward shift in the supply curve as more firms enter the sector, enhancing overall supply for widgets.