SUPPLYMicro Lecture 3

Answer please!!! Explain law of demand. Differentiate dependent & independent

variables. Why does demand curve slope downward? What are the determinants of demand? What happens to the demand curve when any

of these determinants change? Explain by making curves.

Distinguish between change in demand and change in quantity demand explain through diagrams.

Show extension & contraction of demand on curve.

Objectives

By the end of the lecture students will be able to

Define supply, law of supply Draw supply curve Make their own product’s supply

curve Explain movement along supply

curve & shift in supply curve Enlist market determinants of supply

& show their effects on the supply curve

Supply

Quantity supplied is the amount of a good that sellers are willing and able to sell.

Supply Curve

$3.002.502.001.501.000.50

21 3 4 5 6 7 8 9 10 1211

Price of Ice-Cream Cone

Quantity of Ice-Cream Cones

0

Law of Supply

The law of supply states that (Ceteris paribus) other things

remaining constant there is a direct (positive) relationship between

price and quantity supplied.

Change in Quantity Supplied

1 5

Price of Ice-Cream Cone

Quantity of Ice-Cream Cones

0

S

1.00 A

C$3.00

Price and Quantity Supplied:The Law of Supply

8 of 48

• A supply curve is a graph illustrating how much of a product a firm will supply per period of time at different prices.

0

1

2

3

4

5

6

0 10 20 30 40 50Thousands of bushels of soybeans

produced per year

Pric

e of

soy

bean

s pe

r bus

hel (

$)

PRICE (PER

BUSHEL)

QUANTITY SUPPLIED

(THOUSANDS OF BUSHELS

PER YEAR)$ 2 0

1.75 102.25 203.00 304.00 455.00 45

CLARENCE BROWN'S SUPPLY SCHEDULE

FOR SOYBEANS

Activity Make your Market Supply Curve.

Market Supply

Market supply refers to the sum of all individual supplies for all sellers of a particular good or service.

Graphically, individual supply curves are summed horizontally to obtain the market supply curve.

From Individual Supply to Market Supply

The supply of a good or service can be defined for an individual firm, or for a group of firms that make up a market or an industry.

Market supply is the sum of all the quantities of a good or service supplied per period by all the firms selling in the market for that good or service.

From Individual Supply to Market Supply

As with market demand, market supply is the horizontal summation of individual firms’ supply curves.

Activity Make market supply curve.

Determinants of Supply

1. Market price2. Input prices3. Technology4. Expectations 5. Number of producers6. What are some examples?

Change in SupplyPrice of Ice-Cream Cone

Quantity of Ice-Cream Cones

0

S1 S2

S3

Increase in Supply

Decrease in Supply

1.Resource Cost [wages & raw materials] [Inverse]

Wages

Raw Materials

S

If resource cost decreases

supply Increases

[making more $]

If resource cost increases

supply Decreases

[making less $]SS

P

P1

P1

QS1

“Substitutes in production”I only have 200 acres

SS1

P

S2

QS1

S1

PS2

SProducers want to produce more of the good where price is increasing,

or at least, where the price is not going down.

P2

QS2

P2

QS2

S

Because cows produce moremilk, farmersdon’t have to have as manycows.[saves $]

S

P

Supply curvemoves “udderly”to the right.

Less skin abrasionsso happier cowsproduce more milk.

Mooooove over and give me that waterbed.

S3[Inverse]

P

If business have their taxes decreased,it moves the supply curve to the right.

S1 S2

If business have their taxes increased, it moves the supply curve to the left.

I’m losingprofits.”

Shift of Supply VersusMovement Along a Supply Curve

20 of 48

• A higher price causes higher quantity supplied, and a move along the demand curve.

• A change in determinants of supply other than price causes an increase in supply, or a shift of the entire supply curve, from SA to SB.

• In this example, since the factor affecting supply is not the price of soybeans but a technological change in soybean production, there is a shift of the supply curve rather than a movement along the supply curve.

• The technological advance means that more output can be supplied for at any given price level.

Shift of Supply Curve for SoybeansFollowing Development of a New Seed

Strain

To summarize:Change in price of a good or service leads to

Change in quantity supplied(Movement along the curve).

Change in costs, input prices, technology, or prices of related goods and services

leads to

Change in supply(Shift of curve).

Shift of Supply VersusMovement Along a Supply Curve

Increases in Demand and Supply

Higher demand leads to higher equilibrium price and higher equilibrium quantity.

Higher supply leads to lower equilibrium price and higher equilibrium quantity.

Decreases in Demand and Supply

Lower demand leads to lower price and lower quantity exchanged.

Lower supply leads to higher price and lower quantity exchanged.

Relative Magnitudes of Change

• The relative magnitudes of change in supply and demand determine the outcome of market equilibrium.

Relative Magnitudes of Change

• When supply and demand both increase, quantity will increase, but price may go up or down.