Download The law of Supply

The law of Supply
When the price of a good rises, the
quantity supplied will also rise
1. Costs rise as output increases.
2. Higher price means more profit. Firms will switch to the
production of this good from other goods.
3.New producers will emerge. Total supply will increase.
Introductory
Economics
Lecture 4
Recap
SUPPLY SCHEDULE
Supply schedule simply specifies the unit of a good that a
producer is willing to supply i.e. Qs at alternative prices over a
given period.
Quantity Supplied = f (Price)
A positive relationship exists between Qs & P
Summing Up
Price (P)
Quantity Supplied by Quantity Supplied by
One Producer (q)
All 100 Producers (Q)
($ per bushel)
(bushels per month)
(bushels per month)
75
7,500
5
4
3
2
1
70
60
40
7,000
6,000
4,000
10
1,000
Individual producer supply curve
P ($ per bushel)
7
6
5
4
3
2
1
0
0
20
SL
40
60
80
q (bushels per month)
100
Price (P)
Quantity Supplied by Quantity Supplied by
One Producer (q)
All 100 Producers (Q)
($ per bushel)
(bushels per month)
(bushels per month)
75
7,500
5
4
3
2
1
70
60
40
7,000
6,000
4,000
10
1,000
Market supply curve
P ($ per bushel)
7
6
5
4
3
2
1
0
0
2000
SM
4000
6000
8000
Q (bushels per month)
10000
QS = f ( P CORN )
ceteris paribus
( All other things constant )
Other determinants of supply
A. Costs of production
B. profitability of alternative products
(substitutes in supply)
C. Profitability of goods in joint supply
D. Nature and other random shocks
E. Aims of producers
F. Expectations of producers
A : Costs of production
If production costs change then the amount
supplied is likely to change. Costs change
due to :
→ Changes in input prices.
→ Changes in technology.
→ Organizational changes.
→ Changes in govt policy
B: Profitability of alternative
products (substitutes in supply)
• A producer of two goods is more likely to
concentrate on the production of the more
profitable good
C: Profitability of goods in joint
supply
Variant on the previous case.
D: Nature and other random shocks
Problems caused by weather, natural
catastrophes & effects of war, also hazards
like gulabi sundi and american sundi.
E: Aims of producers
A firm may wish to maximize short run
profit. The quantity supplied will obviously
be affected by the aims of the producer.
F: Expectations of producers.
Expectations of increase or decrease in the
price in future. Expectations may prove to
be wrong.
Determinants in context of supply of
butter
a. A reduction in the cost of producing butter.
b. A reduction in the profitability of producing cream or
cheese.
c. An increase in the profitability of skimmed milk.
d. If weather conditions are favorable, grass yields and
hence milk yields are likely to be high.
e. If butter producers expect the price to rise in near
future, they may decide to release less to the market
now.
Shifts in supply curve
Price
S3
S1
S2
Quantity
Supply function
QS = f ( Pg , Cg , a1 … an , j1 … jm , R , A , Pge t+1 )
Quantity Supplied = Qs
Price of the goods = Pg
Profitability of alternative goods = a1…..an
Profitability of the goods jointly supplied = j1….jm
Nature and Other Random Shocks = R
Aims of Producers = A
Expected Price of good = Pge at some future time = t+1
QS = c + d P
QS = - 500 + 1000P
P = QS - C
d
d
Quantity Supplied
S2
QS = - 200 + 1000 P
S0
S1
QS = - 500 + 1000 P
QS = - 800 + 1000 P
Price
-200
-500
-800
Price
S1`
S0`
S2`
4/5
1/2
1/5
Quantity
Important points
1. When d changes 1/d also changes
Where 1/d is the slope of supply curve in PQ space.
Higher the d flatter is the supply curve in PQ space.
Lower the d steeper is the supply curve in PQ space.
2. Complex Supply Equations
Qs = 200 + 80P – 20a1 – 15a2 + 30j
Equilibrium
P
Supply (S)
E
Equilibrium
Price
Demand (D)
Equilibrium
Quantity
Q
Equilibrium for corn market
P
Supply (S)
Excess Supply of
2500
4
3
E
2
Demand (D)
Excess Demand of
4000
4000
4750
6000
7250
8000
Q
Algebraic representation of
equilibrium
QD = 100 – 10 P
QS = 40 + 20 P
QD = QS
Algebraic representation of
equilibrium
QD = QS
100 – 10 P = 40 + 20 P
100 – 40 = 20 P + 10 P
60 = 30 P
30 P = 60
P=2
Thus equilibrium price is $2
Algebraic representation of
equilibrium
Equilibrium Quantity Demanded
QD = 40 + 20(2) = 80
Equilibrium Quantity Supplied
QS = 100 – 10 (2) = 80