Supply Notes

Supply

An individual or firm supplies a good or service if:

• It has the resources and the technology to produce it.
• It can profit from producing it.
• It has made a definite plan to produce and sell it.

Resources and technology determine what is possible. Supply reflects a decision about which technologically feasible items to produce.

The Law of Supply

The higher the price of a good, the greater is the quantity supplied; and the lower the price of a good, the smaller is the quantity supplied.

• Results from the general tendency for the marginal cost of producing a good to increase as the quantity produced increases.
• Producers are willing to supply more of a good only if they can cover their higher marginal cost of production.

Supply vs. Quantity Supplied

• Supply refers to the entire relationship between price and the quantity supplied.
• The quantity supplied is the amount that producers plan to sell at a particular price.
• Example: At point A, when the price = $5, the quantity supplied = 60.

Supply Curve

A graphical representation of the relationship between price and quantity supplied.

Movement Along the Supply Curve

A rise in the price of a product brings an increase in the quantity supplied. As the quantity produced increases, the marginal cost increases. Firms need a higher price to cover the increased marginal costs.

• When the price of a good changes and everything else remains the same, the quantity supplied changes.
• There is a movement along the existing supply curve.

Change in Supply

When some influence other than the price changes, there is a change in supply. The quantity producers plan to sell changes at each price point.

• When supply increases, the supply curve shifts rightward.
• When supply decreases, the supply curve shifts leftward.

Factors That Change Supply

• The Prices of Factors of Production
• The Prices of Related Goods Produced
• Expected Future Prices
• The Number of Suppliers
• Technology
• State of Nature

Prices of Factors of Production

If the price of a factor of production increases, the producers' costs of production increase: supply decreases. With higher costs, producers offer lower quantities at each price point.

• Example: If the price of Lemons increases, the supply of Lemonade decreases. If the price of Lemons decreases, the supply of Lemonade increases.

Prices of Related Goods Produced

Alternative or Substitute Production Process

Another good produced using the same resource. If the price of a substitute in production rises, the supply of a good decreases.

• Example: If the price of ethanol increases, the supply of corn chips decreases. If the price of ethanol decreases, the supply of corn chips increases. Corn can be used for Food (Corn Chips) and Fuel (Ethanol).
• Example: If the rates for Grubhub increase, the supply of Uber decreases. If the rates for Grubhub decrease, the supply of Uber increases. Drivers can drive for Uber or Grubhub.

Complements in Production

Goods that are produced to work together. If the price of a complement in production rises, the supply of a good increases.

• Example: If the price of paint increases, the supply of paint brushes increases.

Expected Future Prices

If the expected future price of a good rises, the supply of the good today decreases.

• Example: If the price of a barrel of oil is expected to increase from $80 to $100 soon because war is imminent, the supply of oil decreases today.

Number of Suppliers

The larger the number of suppliers of a good, the greater is the supply of the good.

• Example: If a second bagel shop opens on Cold Spring Lane, the supply of bagels increases.

Technology

Advances in technology create new products and lower the cost of producing existing products. Advances in technology increase supply.

• Example: New technology, for more powerful batteries, larger screens, and low-power processors, reduces the resources needed to produce smartphones.

State of Nature

The state of nature includes all the natural forces that influence production, for example, weather.

• Example: Good weather in Florida increases the supply of oranges. A natural disaster, i.e., a hurricane, may decrease the supply of oil.

Movement Along the Supply Curve (Recap)

When the price of the good changes & everything else for sellers remains the same, the quantity supplied changes and there is a movement along the supply curve.

Shift in the Supply Curve (Recap)

If some influence other than price changes, Supply changes, and the supply curve shifts.

Summary of Supply Concepts

• Law of Supply: Higher the price, more Supply, Lower price, less Supply
• Supply is determined by available resources and technology.
• Market supply is the sum of all individual and firm supply.
• Supply Curve: line that represents the relationship between price & quantity offered at different prices.
• Movement along the curve: point on the curve changes, but the curve stays the same.
• Shift in Supply: the curve itself changes - a new relationship between price & quantity.

Sources of Shift in Supply:

• Price of the factor of production: Up; Supply: Down (and vice versa)
• Price of a product of substitute production process: Up, Supply: Down
• Price of a product of a complement of production process: Up, Supply: Up
• Number of Suppliers: Up; Supply: Up
• Nature, i.e., Storm: can increase or decrease supply
• New technology or technology improvements: Up; Supply: Up
• Expected future prices: Up; Supply: Down