Download Determinants of Supply

Determinants of Supply
Aims:
The nature of supply
The relationship between price and supply
Market supply
Causes of shifts in the supply curve
The Law of Supply
 Supply is the quantity of a good or service that a
producer is willing and able to supply onto the market at
a given price in a given time period
 The basic law of supply is that as the market price of a
commodity rises, so producers expand their supply onto
the market
 A supply curve shows a relationship between price and
quantity a firm is willing and able to sell
The Supply Curve
Price
Supply
An increase in
price will cause
an
EXPANSION
in Supply.
P2
P1
P3
A fall in price will
cause a
CONTRACTION
in Supply.
Q3
Q1
Q2
Quantity
Explaining the supply decision
 The “quantity supplied” is the amount sellers are willing and able to
offer for sale at a single price
 The change in the price of the good itself causes a movement
ALONG the supply curve
 Supply curves normally slope upward. Why?
 Rising prices act as an incentive for producers to expand output
– potential for higher profits
 Increased output may lead to higher costs of production
 But not all economists accept this convention (A2 theory)
 Increased output might lead to lower costs per unit (known as
economies of scale)
An outward shift in the Supply Curve
Price
S1
S2
P1
Q1
Q2
Quantity
An inward shift in the Supply Curve
Price
S3
S1
S2
P1
Q3
Q1
Q2
Quantity
Causes of shifts in market supply
 Changes in production costs
 Wages,raw materials and components, energy, rents, interest
rates
 Government taxes and subsidies
 Changes in technology – ICT can reduce long term costs but are
expensive in SR
 Climatic conditions (important for agricultural supply)
 Changes in the number of producers in the market
 Changes in the objectives of suppliers in the market
 Changes in the prices of substitutes in production
 The profitability of alternative products (substitutes) or those with joint
supply (crude oil = petrol and paraffin and diesel)
 Expectation of future price changes
Shifts in the Supply curve…
What would cause the supply of butter to rise?
 Reduction in costs of producing – e.g. nitrogen fertiliser = more used
by farmers = better grass = more milk
 Better technology in producing butter
 More govt subsidies to farmers
 Increase in profitability of skimmed milk ….. Because butter and
cream products are jointly produced with skimmed milk.
Pause for mini exercise – cut out strips
 Weather conditions
favourable for favourable grass yield.
for you to select!
More examples of shifts in supply –
Mini exercise 1
 What reasons might be given for the supply of potatoes to fall?
 For what reasons might the supply of leather rise?
 What reasons might be given for the supply of cod to fall?
 For what reasons might the number of plumbers grow?
 What reasons might be given for the number of teachers to fall?
 What reasons might there be for the number of new houses being
built rise?
The Supply Curve
Price
100
The supply curve
shows the quantity
of a product that a
supplier is willing
and able to sell at a
given price in a
given time period
90
80
Supply (S)
70
Price £
60
P1
50
There is usually a
positive relationship
between price and
quantity supplied
40
30
20
10
0
0
20
40
60
80
100
Quantity (000 units per month)
120
140
Quantity Supplied (Qs)
The Supply Curve
Price
100
90
80
An expansion of supply
70
P2
Price £
60
S1
P1
50
40
30
An increase in
market price
causes an
expansion of
quantity supplied
as producers
respond to the
incentive of
higher prices and
higher potential
profits.
20
10
0
0
20
40
60
80
100
Quantity (000 units per month)
120
140
Quantity Supplied (Qs)
The Supply Curve
Price
100
A lower
market price
will lead to a
contraction
in total
output
90
80
70
S1
Price £
60
P1
50
P2
40
A contraction of supply
30
20
10
0
0
20
40
60
80
100
Quantity (000 units per month)
120
140
Quantity Supplied (Qs)
An Outward Shift in the Supply Curve
Price
100
Shifts in the supply curve mean
that more or less will be
supplied onto the market at
each price level
90
80
70
Price £
60
S1
S2
P1
50
40
30
20
10
0
0
20
40
60
80
100
Quantity (000 units per month)
120
140
Quantity Supplied (Qs)
An Inward Shift in the Supply Curve
Price
100
90
S3
80
70
S1
Price £
60
A fall in supply
means that less is
supplied onto the
market at each
price
P1
50
40
30
20
10
0
0
20
40
60
80
100
Quantity (000 units per month)
120
140
Quantity Supplied (Qs)
So get your
whiteboards ready….
Write on one side
MOVEMENT ALONG
On the other
Your Go
SHIFT
Remember that PRICE = contraction
or expansion
All other factors = SHIFT inwards or
outwards…
Mini exercise 2….
 New oil fields starts up in production
In each case BE
PREPARED TO EXPLAIN
• Whether THE move
along the supply curve is
a contraction or
expansion
 The demand for central heating rises
 The price of gas falls
•Or whether THE shift in
the supply curve is to the
left or right
 Oil companies anticipate a surge in demand for central heating oil
 The demand for petrol rises
 New technology decreases the cost of oil refining
 All oil products become more expensive.
Supply images
…. The milk market!
The supply of milk
The milk supply chain
Factors affecting the market supply of
milk
 The price of raw milk from farmers
 Productivity in milk industry
 The number of suppliers in the industry
 Costs of packaging and transportation
 Government subsidies to milk producers
Joint Supply
 Two products are in joint supply when a rise in the output
of one product leads to a rise in the supply of the other
product
Can ewe
think of
examples of
joint supply?
Diagram to show joint supply
Two products are in joint supply when a rise in the output of one product leads
to a rise in the supply of the other product
S Beef
Price
Price
S Beef hide
P2
S1
P3
P1
D1
P4
D
D
Q1
Q2
Quantity bought and sold
Qa
Qb
Qc
Quantity bought and sold
Homework
Worksheet
D:\How the market works\Worksheets\4.
Shifts in supply.doc