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Market Mechanism Market Mechanism SupplySupply

Market Mechanism Market Mechanism SupplySupply

Module 3Module 3Module 3Module 3

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Understand the difference between supplysupply and quantity supplied.quantity supplied.

ObjectivesObjectivesObjectivesObjectives

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Understand the difference betweenUnderstand the difference between supplysupply andand quantity supplied.quantity supplied.

Define the Define the “Law of Supply”“Law of Supply” and explain why the and explain why the supply curve is usually upward sloping.supply curve is usually upward sloping.

ObjectivesObjectivesObjectivesObjectives

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Understand the difference betweenUnderstand the difference between supplysupply andand quantity supplied.quantity supplied.

Define the Define the “Law of Supply”“Law of Supply” and explain why the and explain why the supply curve is usually upward sloping.supply curve is usually upward sloping.

Understand the difference between a Understand the difference between a change in change in supplysupply and a and a change in quantity suppliedchange in quantity supplied..

ObjectivesObjectivesObjectivesObjectives

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Understand the difference betweenUnderstand the difference between supplysupply andand quantity supplied.quantity supplied.

Define the Define the “Law of Supply”“Law of Supply” and explain why the and explain why the supply curve is usually upward sloping.supply curve is usually upward sloping.

Understand the difference between a Understand the difference between a change inchange insupplysupply and a and a change in quantity supplied.change in quantity supplied.

Understand what causes the Understand what causes the supply curve to shift.supply curve to shift.

ObjectivesObjectivesObjectivesObjectives

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Understand the difference between supply and Understand the difference between supply and quantity supplied.quantity supplied.Understand the difference between supply and Understand the difference between supply and quantity supplied.quantity supplied.

Objective 1Objective 1Objective 1Objective 1

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A supply curvesupply curve shows the quantities supplied by a producer at various prices.

Understand the difference between supply and Understand the difference between supply and quantity supplied.quantity supplied.Understand the difference between supply and Understand the difference between supply and quantity supplied.quantity supplied.

Objective 1Objective 1Objective 1Objective 1

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A supply curvesupply curve shows the quantities supplied by a producer at various prices.

Objective 1: … the difference between supply and Objective 1: … the difference between supply and quantity supplied.quantity supplied.Objective 1: … the difference between supply and Objective 1: … the difference between supply and quantity supplied.quantity supplied.

Price

per cup ($)

Quantity Supplied

(cups of coffee)

$0.50 0

1.00 1

1.50 2

2.00 3

2.50 4

3.00 5

3.50 6

4.00 7

4.50 8

5.00 9

Chris’ Supply Schedule Chris’ Supply Curve

The supply curve shows The supply curve shows the relationship between the relationship between the the price price of a product and of a product and the the quantity supplied quantity supplied of of that product.that product.

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Quantity suppliedQuantity supplied is the quantity of a product that a firm is willing and able to supply at a particularparticular price.

Quantity suppliedQuantity supplied refers to a point on the supply curve.

Objective 1: … supply and quantity supplied….Objective 1: … supply and quantity supplied….Objective 1: … supply and quantity supplied….Objective 1: … supply and quantity supplied….

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Quantity suppliedQuantity supplied is the quantity of a product that a firm is willing and able to supply at a particularparticular price.

Quantity suppliedQuantity supplied refers to a point on the supply curve.

If the price of coffee is $1, Chris If the price of coffee is $1, Chris is willing to supply 1 cup (point is willing to supply 1 cup (point “g”). If the price of coffee is $3, “g”). If the price of coffee is $3, Chris is willing to supply 5 cups Chris is willing to supply 5 cups (point (point “l”).“l”). If the price rises to If the price rises to $4.50, Chris is willing to supply $4.50, Chris is willing to supply 8 cups of coffee 8 cups of coffee (point (point “t”“t”).).

Objective 1: … supply and quantity suppliedObjective 1: … supply and quantity suppliedObjective 1: … supply and quantity suppliedObjective 1: … supply and quantity supplied

Quantity Quantity supplied: point supplied: point on the curveon the curve

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Objective 1: … supply and quantity suppliedObjective 1: … supply and quantity suppliedObjective 1: … supply and quantity suppliedObjective 1: … supply and quantity supplied

Supply versus Quantity Supplied:Supply versus Quantity Supplied: Supply refers to the entire curve while quantity supplied is associated with a point on the curve.

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Define the “Law of Supply” and explain Define the “Law of Supply” and explain why the supply curve is upward slopingwhy the supply curve is upward sloping

Objective 2Objective 2

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The Law of SupplyLaw of Supply states that holding everything else constant, an increase in the price of a product causes an increase in the quantity supplied and a decrease in the price of a product causes a decrease in the quantity supplied.

Define the “Law of Supply” and explain Define the “Law of Supply” and explain why the supply curve is upward slopingwhy the supply curve is upward sloping

Objective 2Objective 2

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Objective 2: … explain why the supply curve is upward slopingObjective 2: … explain why the supply curve is upward sloping

Why is there a positive positive relationship between price and quantity supplied?

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Objective 2: … explain why the supply curve is Objective 2: … explain why the supply curve is usually upward slopingusually upward slopingObjective 2: … explain why the supply curve is Objective 2: … explain why the supply curve is usually upward slopingusually upward sloping

Two factors explain the Law of Supply:

1. Profit motive:Profit motive: A higher market price, holding all else constant induces suppliers to increase

quantity supplied because profit margins increase.

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Two factors explain the Law of Supply:

1. Profit motive:Profit motive: A higher market price, holding all else constant induces suppliers to increase quantity supplied because profit margins increase.

2. The law of Increasing Opportunity Cost:The law of Increasing Opportunity Cost: As more and more is produced, resources must be drawn away from alternative uses, bidding up the opportunity cost. Thus, producers require higher prices to supply more of a product.

Objective 2: … explain why the supply curve is Objective 2: … explain why the supply curve is usually upward slopingusually upward slopingObjective 2: … explain why the supply curve is Objective 2: … explain why the supply curve is usually upward slopingusually upward sloping

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Understand the difference between a change in Understand the difference between a change in quantity supplied and a change in supplyquantity supplied and a change in supply

ObjectiveObjective 3

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A change in quantity suppliedchange in quantity supplied refers to a movement along a supply curve in response to a change in the price of the product.

Understand the difference between a change in Understand the difference between a change in quantity supplied and a change in supplyquantity supplied and a change in supply

ObjectiveObjective 3

A change in quantity suppliedchange in quantity supplied refers to a movement along a supply curve in response to a change in the price of the product.

Objective 3: … a change in quantity supplied Objective 3: … a change in quantity supplied and a change in supply.and a change in supply.

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Quantity supplied Quantity supplied changes when price changes when price changes. This is changes. This is shown as a shown as a movement along a movement along a curve.curve.

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Objective 3: … a change in quantity supplied Objective 3: … a change in quantity supplied and a change in supplyand a change in supply

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A change in supplychange in supply is shown as a shift of the entire supply curve. In other words, at every price, quantity supplied has now changed.

Objective 3: … a change in quantity supplied Objective 3: … a change in quantity supplied and a change in supplyand a change in supply

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A change in supplychange in supply is shown as a shift of the entire supply curve. In other words, at every price, quantity supplied has now changed.

A change in supplychange in supply is notnot caused by a

change in price.

Objective 3: … a change in quantity supplied Objective 3: … a change in quantity supplied and a change in supplyand a change in supply

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A change in supplychange in supply is shown as a shift of the entire supply curve. In other words, at every price, quantity supplied has now changed.

A change in supplychange in supply is notnot caused by a change in

price.

A change in supplychange in supply is caused by a change in factors other than the price of the good in question.

Objective 3: … a change in quantity supplied Objective 3: … a change in quantity supplied and a change in supply.and a change in supply.

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A decrease in supplydecrease in supply is represented by a leftward shiftleftward shift of the supply curve.

Objective 3: … a change in supplyObjective 3: … a change in supply

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Initially, at a price of $3.00, Chris Initially, at a price of $3.00, Chris was willing to supply 5 cups of was willing to supply 5 cups of coffee but now at the same price he coffee but now at the same price he is willing to supply 3 cups of coffee is willing to supply 3 cups of coffee (from “(from “ll” to “” to “vv”). ”).

A decrease in supplydecrease in supply is represented by a leftward shiftleftward shift of the supply curve.

Objective 3: … a change in supplyObjective 3: … a change in supply

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An increase in supplyincrease in supply is represented by a rightward rightward shiftshift of the supply curve.

Objective 3: … a change in supplyObjective 3: … a change in supply

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An increase in supplyincrease in supply is represented by a rightward rightward shiftshift of the supply curve.

Objective 3 … a change in supplyObjective 3 … a change in supply

Initially, at a price of $1.00, Chris was willing to supply 1 cup of coffee but now at the same price he is willing to supply 3 cups of coffee (from “g” to “r”).

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Objective 4Objective 4

Understand what causes the supply curve to shiftUnderstand what causes the supply curve to shift

Recall the ceteris paribusceteris paribus requirement: Along a supply curve, only price and quantity supplied change; all other factors that affect the supply decision are held constant.

What are these other factors (other than price) that affect the supply decision?

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Objective 4Objective 4

Understand what causes the supply curve to shiftUnderstand what causes the supply curve to shift

1. Price of the good

Determinants of Supply include:Determinants of Supply include:

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Objective 4Objective 4

Understand what causes the supply curve to shiftUnderstand what causes the supply curve to shift

1. Price of the good

2. Prices of inputs such as wages

Determinants of Supply include:Determinants of Supply include:

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Objective 4Objective 4

Understand what causes the supply curve to shiftUnderstand what causes the supply curve to shift

1. Price of the good

2. Prices of inputs such as wages

3. Technological change

Determinants of Supply include:Determinants of Supply include:

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Objective 4Objective 4

Understand what causes the supply curve to shiftUnderstand what causes the supply curve to shift

1. Price of the good

2. Prices of inputs such as wages

3. Technological change

4. Prices of substitutes in production (rival goods)

Determinants of Supply include:Determinants of Supply include:

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Objective 4Objective 4

Understand what causes the supply curve to shiftUnderstand what causes the supply curve to shift

1. Price of the good

2. Prices of inputs such as wages

3. Technological change

4. Prices of substitutes in production (rival goods)

5. Price of complements in production (jointly produced goods)

Determinants of Supply include:Determinants of Supply include:

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Objective 4Objective 4

Understand what causes the supply curve to shiftUnderstand what causes the supply curve to shift

1. Price of the good

2. Prices of inputs such as wages

3. Technological change

4. Prices of substitutes in production (rival goods)

5. Price of complements in production (jointly produced goods)

6. Number of firms in the market

Determinants of Supply include:Determinants of Supply include:

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Objective 4Objective 4

Understand what causes the supply curve to shiftUnderstand what causes the supply curve to shift

1. Price of the good

2. Prices of inputs such as wages

3. Technological change

4. Prices of substitutes in production (rival goods)

5. Price of complements in production (jointly produced goods)

6. Number of firms in the market

7. Expectations of suppliers about future prices

Determinants of Supply include:Determinants of Supply include:

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Objective 4Objective 4

Understand what causes the supply curve to shiftUnderstand what causes the supply curve to shift

1. Price of the good

2. Prices of inputs such as wages

3. Technological change

4. Prices of substitutes in production (rival goods)

5. Price of complements in production (jointly produced goods)

6. Number of firms in the market

7. Expectations of suppliers about future prices

8. Government policies that affect production

Determinants of Supply include:Determinants of Supply include:

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A change in the price of the good causes a movement along the supply curve.

Objective 4: … what causes the supply Objective 4: … what causes the supply curve to shiftcurve to shift

A change in any determinant other than the change in any determinant other than the priceprice of the good in question causes a shiftshift of the supply curve.

Objective 4: … what causes the supply Objective 4: … what causes the supply curve to shiftcurve to shift

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A change in the price of the good causes a movement along the supply curve.

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The United Auto Workers (UAW) has successfully negotiated higher wages. What happens in the auto industry?

Objective 4: … what causes supply to shiftObjective 4: … what causes supply to shift

Example 1: Supply shifter – WagesExample 1: Supply shifter – Wages

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The United Auto Workers (UAW) has successfully negotiated higher wages. What happens in the auto industry?

Do not confuse wageswages (supply determinant)

with incomeincome (demand determinant).

Objective 4: … what causes supply to shift Objective 4: … what causes supply to shift

Example 1: Supply shifter – WagesExample 1: Supply shifter – Wages

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The United Auto Workers (UAW) has successfully negotiated higher wages. What happens in the auto industry?

Do not confuse wageswages (supply determinant)

with incomeincome (demand determinant).

An increase in wages increase the cost of production. The supply curve shifts left.

Objective 4: … what causes supply to shiftObjective 4: … what causes supply to shift

Example 1: Supply shifter – WagesExample 1: Supply shifter – Wages

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Suppose suppliers of silver expect the price ofsilver to fall next monthfall next month. How does this affect thesupply of silver todaytoday?

Today, supply increases in anticipation of lower prices in the future.

Example 2: Supply shifter – change in producers’ Example 2: Supply shifter – change in producers’ expectationsexpectationsExample 2: Supply shifter – change in producers’ Example 2: Supply shifter – change in producers’ expectationsexpectations

Objective 4: … what causes supply to shiftObjective 4: … what causes supply to shift

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Suppose suppliers of silver expect the price of silver to fall next month. How does this affect the supply of silver today?

Today, supply increases in anticipation of lower prices in the future.

S1: Today’s supply curve with a new set of expectations about price

S0: Today’s demand curve with some given set of expectations about price

The Supply of Silver

Example 2: Supply shifter – change in producers’ expectationsExample 2: Supply shifter – change in producers’ expectations

Objective 4: … what causes supply to shiftObjective 4: … what causes supply to shift

Today’s price

Land is used to grow soybean and corn. What happens to the supply of corn following a decrease in the price of soybean?

Example 3: Supply shifter - change in the price of Example 3: Supply shifter - change in the price of a rival (in production) gooda rival (in production) good

Objective 4: … what causes supply to shiftObjective 4: … what causes supply to shift

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Land is used to grow soybean and corn. What happens to the supply of corn following a decrease in the price of soybean?

Soybean and corn are substitutes in substitutes in production or rivalproduction or rival goodsgoods.

Example 3: Supply shifter - change in the price Example 3: Supply shifter - change in the price of a rival (in production) goodof a rival (in production) good

Objective 4: … what causes supply to shiftObjective 4: … what causes supply to shift

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Land is used to grow soybean and corn. What happens to the supply of corn following a decrease in the price of soybean?

Soybean and corn are substitutes in production or substitutes in production or rivalrival goodsgoods.

When two goods are rivals in production, they must share at least one common inputcommon input. In this example, land is the common input and soybean and corn are rivals in production.

Example 3: Supply shifter - change in the price of a rival Example 3: Supply shifter - change in the price of a rival (in production) good(in production) good

Objective 4: … what causes supply to shiftObjective 4: … what causes supply to shift

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A decrease in the price of soybean will decrease the quantity supplied of soybean. This is shown by a movement along the supply curve for soybean.

Objective 4: … what causes supply to shiftObjective 4: … what causes supply to shift

Example 3: Supply shifter - change in the price of Example 3: Supply shifter - change in the price of a rival (in production) gooda rival (in production) good

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A decrease in the price of soybean will decrease the quantity supplied of soybean. This is shown by a movement along the supply curve for soybean.

Farmers now allocate more land toward producing corn. The supply curve for corn shifts right.

A decreasedecrease in the price of soybean leads to an increaseincrease in the supply of corn, given that soybean and corn are rivals rivals in production.in production.

Objective 4: … what causes supply to shiftObjective 4: … what causes supply to shift

Example 3: Supply shifter - change in the price of Example 3: Supply shifter - change in the price of a rival (in production) gooda rival (in production) good

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Two goods S and C are rivals (or substitutes) in production if a decrease in the price of good Sdecrease in the price of good S leads to an increase in the supply of good Cincrease in the supply of good C or, if an increase in the price of good S leads to an decrease in the supply of good C.

Definition of Rivals in ProductionDefinition of Rivals in Production

Objective 4: … what causes supply to shiftObjective 4: … what causes supply to shift

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Two goods S and C are rivals (or substitutes) in production if a decrease in the price of good Sdecrease in the price of good S leads to an increase in the supply of good Cincrease in the supply of good C or if an increase in the price of good S leads to an decrease in the supply of good C.

A negativenegative relationship exists between the price of good S and the supply of good C.

Definition of Rivals in ProductionDefinition of Rivals in Production

Objective 4: … what causes supply to shiftObjective 4: … what causes supply to shift

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Two goods S and C are rivals (or substitutes) in production if a decrease in the price of good Sdecrease in the price of good S leads to an increase in the supply of good Cincrease in the supply of good C or if an increase in the price of good S leads to an decrease in the supply of good C.

A negativenegative relationship exists between the price of good S and the supply of good C.

Do Not Confuse substitutes in consumption with rivals in production (also called “substitutes in production”).

Definition of Rivals in ProductionDefinition of Rivals in Production

Objective 4: … what causes supply to shiftObjective 4: … what causes supply to shift

Market Mechanism Market Mechanism SupplySupply

Market Mechanism Market Mechanism SupplySupply

End of Module 3End of Module 3End of Module 3End of Module 3

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