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Supply
What is Supply?
• Supply is how much a firm is willing to sell
at every given price, ceteris paribus
• Thus, if all else remains the same and the
price of a good goes up, what would you
expect the response of a firm to be?
– To produce more, since prices are going up, so
will profits
Law of Supply
• Law of Supply - the price of a product (or
service) is directly related to the quantity
supplied, ceteris paribus.
• While demand typically refers to
consumers, supply typically refers to firms.
Supply Schedules and Curves
• Supply Schedule/Curve - a table or diagram
showing the relationship between the price
of a good and the quantity supplied, ceteris
paribus.
Supply Schedule
P ($)
Qs per month
$20
15
$15
7
$10
5
Supply Curve
P($)
20
AS
B
15
10
C
5
0
5
10
15
Qs per month
Theory of Market Entry
• When the price/supply of a product rises,
that product stands out as a good
opportunity to make money.
• Examples
– Food: Subway Franchises
– Media: Type of Music, TV Shows, Movies
Change in Supply
Factors That Cause a Change in Supply
• Input Costs
Input Costs
• Any change in the cost of an input to
produce a good will affect supply
– Raw materials, machinery, labor
Change in Supply
Factors That Cause a Change in Supply
• Input Costs
• Technology
Technology
• Improvement in technology lowers costs
• Lower cost of production increases Supply
• Worsening of technology increases costs
• Higher cost of production decreases Supply
Change in Supply
Factors That Cause a Change in Supply
• Input Costs
• Technology
• Expectations of Future Price
Expectations of Future Prices
• Firms expect price of their goods to increase or
decrease in the future.
• Increase in price
• Supply increases today
• Firm would prefer to sell today when price is higher
• Decrease in price
• Supply decreases today
• Firm would prefer to wait until the good can be sold for
a higher price
Change in Supply
Factors That Cause a Change in Supply
• Input Costs
• Technology
• Expectations of Future Price
• Number of Suppliers
Number of Suppliers
• The number of sellers in the market
determines the amount of quantity supplied
at every price
Change in Supply
Factors That Cause a Change in Supply
• Input Costs
• Technology
• Expectations of Future Price
• Number of Suppliers
• Government Influence
Government Influence on Supply
• Subsidies: Government payment that
supports a business or market.
• Taxes: Government reduces supply of a
product by putting a excise tax on it.
• Regulation: Government intervention in a
market that affects price, quantity or quality
of a good