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SUPPLY
Objectives
Explain that market supply is
based on each seller’s cost and
the number of sellers in the
market; analyze the effect of
factors that can change supply.
Big Questions
What is Supply?
What causes a change
in Supply?
What is
Supply?
 Supply is defined as the amount of
a product that would be offered for
sale at all possible prices that could
prevail in the market.
Law of Supply
 The basic law of supply is
common sense: as prices rise,
supply increases; as prices
fall, supply decreases.
The Supply Curve
Supply curves are a lot like demand
curves. Information about the
amount of a specific good or service
that a provider will supply at
various prices is plotted on a graph
like this. Price is on the vertical
axis, Quantity is on the horizontal.
Supply curves slope upward,
reflecting the Law of Supply.
Higher Price = Higher Quantity
Change in Supply
Factors that can cause
a Change in Supply
• Cost of Inputs
• Government
regulations
• Productivity
• The number of
• Technology
competitors
• Taxes and subsidies
• Expectations
Cost of Inputs
(Factors of Production)
As production costs change,
a producer’s willingness and
ability to supply a product at
a specific price will change.
The Circular Flow of Economic Activity
Cost of Inputs
(Factors of Production)
Land
Labor
Capital
Entrepreneurship
Cost of Inputs
(Factors of Production)
Increased
production costs
will decrease
supply and shift
the supply curve
to the left.
Cost of Inputs
(Factors of Production)
If a product
becomes cheaper to
produce, suppliers
will offer more for
sale at each market
price. The supply
curve shifts to the
right.
Productivity
When management motivates its workers, or if
workers decide to work more efficiently,
productivity should increase. The result is more
can be produced at every price. The supply
curve shifts to the right.
Happy workers = more productivy =
increased supply
Technology
The introduction of a new machine, chemical, or
industrial process can affect supply by lowering
the cost of production or by increasing
productivity.
New technology = greater
productivity = increased supply
Technology
New technologies do not always work as
expected, of course. Equipment can break down
and shift the curve to the left.
Technology Fail = lower productivity
= lower supply
Taxes and Subsidies
Firms view taxes as costs. If
taxes increase, the cost of
production goes up, supply
decreases. Conversely, if taxes
decrease, firms will supply
more.
A subsidy is a government
payment to an individual,
business, or other group to
encourage or protect a certain
type of economic activity. The
government pays suppliers to
guarantee a consistent supply.
The subsidy lowers production
costs and allows for greater
supply.
Expectations
 Expectations about the future price of a product can also affect
the supply curve. If producers think the price of a product will
go up, they may withhold some of the supply.
Government Regulations
 When the government establishes new regulations, the cost
of production can be affected, causing a change in supply.
In general,
 Increased regulations = increased production costs = lower
supply.
 Relaxed regulations = Greater supply.
 We can talk about externalities later.
Number of Sellers
A change in the number of suppliers
causes the market supply curve to
shift to the right or left.
The larger the number of suppliers,
the greater the market supply.
Reverse is also true.
Elasticity of Supply
Supply elasticity is a measure of the
way in which quantity supplied
responds to a change in price.
Determinants of Supply
Elasticity
Only Production considerations
determine supply elasticity. If a
firm can react quickly to higher or
lower prices, then supply is likely to
be elastic. If the firm takes longer
to react, supply is inelastic.
What is better for the firm?