model of supply
DESCRIPTION
MODEL OF SUPPLY. The model of supply is an attempt to explain the amount supplied of any good or service. SUPPLY DEFINED. The amount of a good or service a firm wants to sell, and is able to sell per unit time. THE “STANDARD” MODEL OF SUPPLY. The DEPENDENT variable is the amount supplied. - PowerPoint PPT PresentationTRANSCRIPT
Supply slide 1
MODEL OF SUPPLYThe model of supply is an attempt to explain the
amount supplied of any good or service.
SUPPLY DEFINED
The amount of a good or service a firm wants to sell, and is able to sell per unit time.
Supply slide 2
THE “STANDARD” MODEL OF SUPPLY
The DEPENDENT variable is the amount supplied.
The INDEPENDENT variables are:the good’s own price
the prices of inputs used in its production
the technology of production
expectations
taxes and subsidies
Supply slide 3
YOU COULD WRITE THE MODEL THIS WAY:
The supply of lemon-lime:
QS(lemon-lime) = S(Plemon-lime, Pcitric acid,
Pcarbon dioxide, Plabor, . . . ,technology,
expectations, taxes & subsidies)
Supply slide 4
THE SUPPLY CURVE
The supply curve for any good shows the quantity supplied at each price, holding constant all other determinants of supply.
The DEPENDENT variable is the quantity supplied.
The INDEPENDENT variable is the good’s own price.
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THE LAW OF SUPPLY
The Law of Supply says that an increase in a good’s own price will result in an increase in the amount supplied, holding constant all the other determinants of supply.
The Law of Supply says that supply curves are positively sloped.
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A SUPPLY CURVE
A supply curve must look like this, i.e., be positively sloped.
own price
quantity supplied
supply
Market for lemon-lime
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The supply curve means:
You pick a price, such a p0, and the supply curve shows how much is supplied.
own price
quantity supplied
supply
p0
Q0
Market for lemon-lime
Supply slide 8
own price
quantity supplied
supply
p0
Q0
Market for lemon-lime
If the price of lemon-lime rises, how is the supply curve
affected?
Go to hidden slide
Supply slide 10
AN IMPORTANT POINT
When drawing a supply curve notice that the axes are reversed from the usual convention of putting the dependent (y) variable on the vertical axis, and the independent (x) variable on the horizontal axis.
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ECONOMISTS HAVE HYPOTHESES ABOUT HOW CHANGES IN EACH OF THE INDEPENDENT VARIABLES
AFFECTS THE AMOUNT SUPPLIED
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Other factors affecting supply
The question here is how to show the effects of changes in input prices, technology, expectations, and taxes.
The answer, of course, is that changes in input prices, technology, expectations, or taxes cause the supply curve to shift.
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Changes in input prices
Consider the supply of lemon-lime, and suppose the price of citric acid, a crucial input to lemon-lime, falls. Lemon-lime firms now find that lemon-lime production is more profitable than it was before, and they respond to this be increasing the supply of lemon-lime.
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The price of citric acid falls from $300 per ton to $100 per
ton.
own price
quantity
supply @ citric acid price of $300/ton
Market for lemon-lime
How will this affect the supply curve for lemon-lime?
How will this affect the supply curve for lemon-lime?
Go to hidden slide
Supply slide 16
Change in technology
An improvement in technology makes it possible to produce a level of output with fewer inputs than before.
Because this lowers the cost of production, profits rise, and firms will try to supply more.
Supply slide 17
own price
quantity
supply with old technology
Market for lemon-lime
Suppose lemon-lime technology improves.
How does this affectthe supply curve for lemon-lime?
How does this affectthe supply curve for lemon-lime?
Go to hidden slide
Supply slide 19
price
Q
S (no tax)
How would you suspect an excise tax affects the supply of a good?
Go to hidden slide
Supply slide 21
Supply summary
Supply is a function of own price, input prices, and technology.
The supply curve shows supply as a function of own price, all else constant.
Changes in a good’s own price show up as movements along a supply curve.
Changes in input prices, technology, expectations, or taxes show up as shifts in the supply curve.