Download Ch. 2.2 Supply

Chapter 2
Supply
P42-45
SUPPLY
• The relationship between supply
and price
• The supply curve
The supply curve:
The supply of potatoes (monthly)
Price of
potatoes
Farmer X's
supply
Total Market
supply
(pence per kg)
(tonnes)
(tonnes: 000s)
a
4
50
100
b
8
70
200
c
12
100
350
d
16
120
530
e
20
130
700
Market supply of potatoes (monthly)
20
Supply
16
Price (pence per kg)
a
P
Q
4
100
12
8
a
4
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
Market supply of potatoes (monthly)
20
Supply
Price (pence per kg)
16
a
b
P
Q
4
8
100
200
12
b
8
a
4
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
Market supply of potatoes (monthly)
20
Supply
P
Price (pence per kg)
16
4
a
b
8
c 12
c
12
b
8
a
4
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
Q
100
200
350
Market supply of potatoes (monthly)
20
Supply
d
Price (pence per kg)
16
P
4
a
b
8
c 12
d 16
c
12
b
8
a
4
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
Q
100
200
350
530
Market supply of potatoes (monthly)
e
20
Supply
d
Price (pence per kg)
16
P
4
a
b
8
c 12
d 16
e 20
c
12
b
8
a
4
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
Q
100
200
350
530
700
Market supply of potatoes (monthly)
e
20
Supply
d
Price (pence per kg)
16
P
4
a
b
8
c 12
d 16
e 20
c
12
b
8
a
4
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
Q
100
200
350
530
700
e
Supply
20
d
P
Price (pence per kg)
16
4
a
b
8
c 12
d 16
e 20
c
12
b
8
Supply Curve
Slopes
a
4
Upwards
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
Q
100
200
350
530
700
The supply curve
• Why did we draw this as upward sloping?
– supply curves generally slope upwards since
as a general rule producers are willing to
supply more as price people are preparedy to
pay rises
• Thus, the Quantity Supplied rises as the
Price rises
e
Supply
20
QS Up
d
P
Price (pence per kg)
16
P Up
4
a
b
8
c 12
d 16
e 20
c
12
b
8
Supply
a
4
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
Q
100
200
350
530
700
Supply Curve
• Quantity Supplied rises as Prices rises so
Change in Quantity is Positive when
Change in Price is Positive
• Thus:
– we say that Supply is a Positive Function
of Price
•
• QS=f(P)
• Means Supply Curve slopes Up
SUPPLY
• SO:
• The supply curve slopes upwards Ceteris
Paribus
• So What is being held constant here?
SUPPLY
• Other determinants of supply
–Price of inputs / costs of production
–Capital (K ) price: r
–Labour (L) price: w
–Raw Materials (Oil, Materials Etc) Pm
• So QS=f(P) can be generalised to
• QS=f(P, r,w, Pm ,……. )
EVEN MORE Determinants of Supply
•
•
•
•
Price
Price of Inputs
Technology
Profitably of Alternative Products
– Price of good x rises, switch from
supplying good y
• Profitably of goods in joint supply
– Steaks and Cheap Cuts of Mince and
Offal
• Strikes, Nature, Random Shocks
SUPPLY
• QS=f(P, r,w, Pm ,……. )
• Note: when we drew the diagram we
graphed QS against P. So P is the
ENDOGENOUS variable.
• r,w,Pm are not explicitly in the diagram so
they are the EXOGENOUS variables.
SUPPLY
• Movements along and shifts in the supply
curve
• Again a change in Price (the endogenous
variable) causes movements along the
demand curve
• QS=f(P, r,w, Pm ,……. )
Movement Along the Supply Curve
e
20
Supply
d
Price (pence per kg)
16
c
12
b
8
a
4
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
Shifts in SUPPLY
• A change in an Exogenous variable causes
shifts in the supply curve
• QS=f(P, r,w, Pm ,……. )
Shifts in the supply curve
P
S0=f(P)
O
Q
Shifts in the supply curve: An improvement in
P
Technology
S0
S1
Increase
O
Q
Shifts in the supply curve: Pm goes up, e.g. Oil
P
S2
S0
Decrease
O
Q
Shifts in the supply curve
P
S2
S0
S1
Oil Price UP
Decrease
Tech. Improves
Increase
O
Q
• So now have drawn a demand curve
• And a supply curve
• Where do we go from here?
• We use the information we have to
determine the price that obtains in the
market and hence the quantity demanded
and supplied