Supply and its

Determinants

Supply
Just

like with demand, we are going to start with thinking

about marketslike the Product and Factor Markets from
last chapter.

In

any market, the Sellers are the Suppliers.

Supply

The willingness and the ability to produce

(or service or resource) and sell a product at a range of
prices.

Law

of Supply Producers are willing to sell more or

something at a higher price.

Basically,

its the opposite of the Law of Demand. As prices

increase, quantity supplied will increase. And as prices

Lets try to show this on the

board
Selling Cans of Soda

Hauling Bricks

$.25

$.35

$8/hour

$.45

$10/hour

$.55

$12/hour

$.65

$14/hour

$.75

$16/hour

$.85

$18/hour

and on

$20/hour

and on

It should look something like

this
S

Changes in Supply
Again,

it is important to understand that a change in

price, only changes the quantity supplied. It does
not change the supply itself.

This

is called a shift along the supply curve.

Factors that Shift Supply

Resource
Prices

Technology
And
Productivity

Government
Actions

Supply

Number
Of
Producers

Expectations
Of
Producers

Price of Inputs (Resource Prices)

When

costs go up, profits go down, so

that the willingness to supply also goes
down.

Think

about selling cans of coke. The

input price is how much you originally
get the coke for. If the whole sale price
went up to $.45, how would that change
the supply chart?

Technology/Labor Productivity
Advances

in technology and labor

productivity reduce the number of inputs
needed to produce a given supply of
goods.

Costs

go down, profits go up, leading to

increased supply.

Think

about hauling bricks. If you owned

a robot, how would that change the chart?

Expectations
If

suppliers expect prices to rise in the

future, they may store today's supply to
reap higher profits later.

Number of Suppliers
As

more people decide to supply a good

the market supply increases.

Taxes and Subsidies

When

taxes (like on cigarettes) go up,

costs go up, and profits go down, leading
suppliers to reduce output.

When

government subsidies (when the

government helps you out, like farmers
with corn) go up, costs go down, and
profits go up, leading suppliers to
increase output.

Decrease in Supply

Increase in Supply

Change in Supply vs.

a Change in the Quantity Supplied

So in summary
Supply

means how much people will sell of something at

any given price.

change in price will change the quantity supplied, but

not the supply curve itself. This is a shift along the
supply curve.

There

are some things that will cause a shift in the

supply curve such as
Price

of Inputs (Resources)

Technology/Labor
Expectations
Number

Productivity

of Suppliers

of Suppliers

So now lets practice.

John

owns a factory making blue

jeans. Originally he planned on
paying his workers $10 an hour.
But then he realized that wasnt
enough to hire the level of skill that
he needed. He realizes that he will
need to pay them at least $15 an
hour. What will happen to his
supply curve?

It

will shift to the left

(decrease). To
produce the same
quantity at any given
level he will need to
charge more.

Lets say I own a record store where I buy and

sell records. Think about the following
scenarios.

a) Another record store

opens down the street that
also buys used records.
Now I have to pay more for
the used records before I
can sell them again.

b) The landlord now

includes utilities in my rent
payment, so I no longer
have to pay for electricity.

a) My supply curve will shift left.

Since I have to pay more for each
record, I make less profit on every
sale. This means that for any
given price, I will be willing to sell
fewer records.

b) My supply curve will shift to

the right. Since I no longer have
to pay for electricity, my costs are
lower. So now I am willing to sell
more records at any given price.

The

government offers corn farmers

a $1 subsidy for every pound of
corn sold. Instead of making $2 per
pound, they now make $3. What
will happen to the market supply
curve?
It will increase (shift right) because I
now have an incentive to supply
more.

More Supply Practice

YOU WILL NEED EITHER A SHEET OF
PAPER OR A WHITE BOARD

1. A software company
invests in a set of fast, new
computers that allow
employees to test their new
programs easily and quickly.
WHICH FACTOR IS THIS AND HOW WILL
IT AFFECT SUPPLY?

2. A farmer is deciding how

much tobacco and corn to
grow on the farm. Congress
recently cut the subsidies that
it pays farmers to grow
tobacco.
WHICH FACTOR IS THIS AND HOW WILL
IT AFFECT HIS TOBACCO?

3. You own a company

that makes wires. The
price of copper wire has
recently gone up.
WHICH FACTOR IS THIS AND HOW
WILL IT AFFECT SUPPLY?

4. A tool-making company hires

several workers who got
degrees from a technical
school, where they learned
manufacturing techniques.
WHICH FACTOR IS THIS AND HOW WILL IT AFFECT
SUPPLY?

5. A pancake restaurant is
successful in a downtown
mall. Another pancake
restaurant opens up in a
building across from the mall
parking lot.
WHICH FACTOR IS THIS AND HOW WILL IT AFFECT
SUPPLY?

Now, lets take a quiz.

Please put everything away.
MAKE SURE TO ASK QUESTIONS
NOW, IF YOU HAVE THEM.