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Supply Analysis 1 CH # 5 MICRO Economics Supply تجزيهوتحليلعرضه 2 / 99 MICRO Economics TERMS TO KNOW: 1 2 3 Meaning of supply and Stock Law of supply, schedule and Diagram Changes in supply MICRO Economics What is Supply? Supply is the willingness and ability of sellers to produce and offer to sell different quantities of a good at different prices during a specific time period. 4 / 99 MICRO Economics Supply and Stock: عرضه Supply means the quantities of a commodity offered for sale at a given price. ذخيره Stock means the total quantity of a commodity which a seller has with him in warehouse and has not yet brought for sale. MICRO Economics Firm’s Supply Curve and Market Supply Curve A firm’s supply curve is a supply curve for that particular firm A market supply curve is the sum of all firm’s supply curves. 6 / 99 MICRO Economics Reserve price This the minimum price which a seller does not want to sell any quantity. For example , a person is selling chairs and minimum price is the 500 AF, less than this price seller is not his chairs, its called reserve price. That depend upon on product nature and circumtanceses. 7 / 99 MICRO Economics Supply types Very short supply Short supply Long supply 8 / 99 MICRO Economics 1 .Very short supply Refers to day to day to market supply. This kind of supply is fixed and can not be increased suddenly and also perishable goods. 9 / 99 MICRO Economics Short Supply Refers to such period of time which is enough to make adjustment by sellers to respond to price change. However, the time available is not very long. So, it is possible to manage supply within short time says 2 or 3 days. 10 / 99 MICRO Economics Long period supply Long period supply means that firm and industry having enough time to adjust his supply according to demand of peoples in future, long period supply all factors of production are variables, producers can change labor, land, capital within that time 11 / 99 MICRO Economics LAW OF SUPPLY قانون عرضه The law of supply states that, other factors remaining the same, when the price of a particular commodity rises, its quantity supplied (Qs) also rises and and decreases with fall in price.. There is a direct or positive relationship between the price of a commodity and quantity offered for sale over a specified period of time. MICRO Economics Schedule and Diagram: جدولو نمودار Law of Supply can be explained with the help of the following schedule and a diagram. Supply Line Price Price of good (X) 20 25 Quantity supplied (Qs) 35 100 30 150 25 30 180 35 200 20 100 150 180 200 Qs MICRO Economics Changes in Supply The economists classify the changes in supply into two types: I. Movements along the supply curve (supply changes due to change in price): II. Shift of the supply curve (changes in supply due to change in other factors) MICRO Economics Movement VS Shift in supply Price Other factors MICRO Economics Shift in Supply because of following factors Prices of Resources Technology Taxes Quotas Number of Sellers Future Price Weather Subsidies 16 / 99 MICRO Economics Prices of Resources When resource prices fall, sellers are willing and able to produce more of the good and offer it for sale. 17 / 99 MICRO Economics Technology Technology is the body of skills and knowledge concerning the use or resources in production. An advancement in technology is the ability to produce more output with a fixed amount of resources. An advancement in technology can help lower the per-unit cost, which is the average cost of producing the good. 18 / 99 MICRO Economics Taxes Taxes on production can increase the per-unit costs of producing a good. Taxes cause the supply curve to shift to the left. 19 / 99 MICRO Economics Subsidies Subsidies are financial payments made by government for certain actions. Subsidies can increase production, causing the supply curve to shift to the right. 20 / 99 MICRO Economics Number of Sellers The number of sellers can also impact the supply curve. If more sellers begin producing a good, supply increases, shifting the supply curve to the right. 21 / 99 MICRO Economics Future Price Expectations of future price movements can cause sellers to either increase or decrease the current supply. 22 / 99 MICRO Economics Weather Think of the effect the weather can have on the supply of agricultural goods such as corn and wheat. 23 / 99 MICRO Economics Determinants of Supply Changes in factor prices (cost of production decrease or increase) if COP is decreased so low price & more supply. Changes in Technique (improved techniques will lower cost of production so more supply) Improvement in the means of transportation Climatic changes in case of Agricultural products (if good weather then bumper crops & more supply) Political changes MICRO Economics Changes in Supply (cont’d): Movements along the supply curve: Price c P3 b P2 P1 a Q1 Q2 Q3 Qs MICRO Economics Changes in Supply (cont’d): Shift of the supply curve: S0 Price S1 Rise Fall P1 Q0 Q1 Q2 Qs S2 MICRO Economics Market Effects of Changes in Supply Changes in Supply Shift the Supply Curve An increase in supply shifts the supply curve to the right when: A decrease in supply shifts the supply curve to the left when: The cost of an input decreases The cost of an input increases A technological advance decreases production cost The number of firms increases The number of firms decreases Producers expect a lower price in the future Producers expect a higher price in the future Product is subsidized 27 of 42 Product is taxed MICRO Economics Key Terms perfectly competitive market change in quantity supplied demand schedule market supply curve individual demand curve market equilibrium quantity demanded excess demand law of demand excess supply change in quantity demanded change in demand market demand curve normal good supply schedule substitute good quantity supplied complementary good inferior good change in supply 28 of 42 MICRO Economics MARKET EQUILIBRIUM (Demand and supply) MICRO Economics DEMAND: The quantity of a commodity or service consumer wanted to buy at a specified price and time. SUPPLY It is the amount of a commodity that sellers are able and willing to offer for sale at different prices per unit of time. MICRO Economics Equilibrium The equilibrium is a market situation in which demand for a product becomes equal to the supply of the product. The equilibrium price is the price at which the quantity of a good demanded in a given time period equals the quantity supplied. MICRO Economics Price Equilibrium The price of the commodity in the market is determined by the inter-section of the forces of demand and supply. The price at which demand and supply are equal, is known as an equilibrium price. The quantity bought and sold at this equilibrium price is known as equilibrium output or amount. MICRO Economics EQUILIBRIUM PRICE QS(SUPPLY) QD(DEMAND) MARKET 05 10 15 20 25 10 20 30 40 50 50 40 30 20 10 D>S D>S D=S D<S D<S GRAPHICAL EQUILIBRIUM MICRO Economics equilibrium supply PRICE =15 demand QD=QS 30 MICRO Economics Market Surplus A market surplus is the amount by which the quantity supplied exceeds the quantity demanded at a given price – excess supply. A market surplus is created when the seller’s asking prices are too high. When prices are high so demand will go down and ultimately demand and supply equality will be attained. MICRO Economics Market Shortage A market shortage is the amount by which the quantity demanded exceeds the quantity supplied at a given price – excess demand. In market shortage the prices will go up and ultimately will led to more supply. Thus equilibrium is the situation where both consumers as well as producers are agreed (acceptable situation)and price is settled. PriceMICRO S Economics PE D QE Quantity PE and QE represent the equilibrium price and quantity 37 37 / 99 MICRO Economics What is Equilibrium Price? The price that equates the quantity demanded and the quantity supplied 38 38 / 99 MICRO Economics What happens if price is below equilibrium? A shortage, or excess demand, arises 39 39 / 99 P At MICRO 2, QD > QS, thus a shortage or excess demand exists Economics S P2 D Shortage QS QD 40 40 40 / 99 MICRO Economics How is the shortage eliminated? The price rises, leading to a decrease in quantity demanded and an increase in quantity supplied. 41 41 / 99 MICRO Economics What happens if price is above equilibrium? A surplus, or excess supply, arises 42 42 / 99 AtMICRO P1, QD < QS, thus a surplus or excess supply Economics exists Surplus P1 S D QS QD 43 43 43 / 99 MICRO Economics How is the surplus eliminated? The price falls, leading to a decrease in quantity supplied and an increase in quantity demanded. 44 44 / 99 Summary, shortages, surpluses, and equilibrium MICRO Economics P1 Surplus S P3 P2 Shortage D Q3 ©1999 South-Western College Publishing 45 / 99 45 45 MICRO Economics Summary, supply changes Increased supply, price falls, quantity rises Decreased supply, price rises, quantity falls 46 46 / 99 MICRO Economics Objective Questions Which one is increasing function of price 1. Demand 2. Supply 3. Consumption It describe the law of supply 1. Supply curve 2. Supply equation 3. Supply schedule 47 / 99 MICRO Economics Questions Supply curve will shift when 1. Price falls 2. Price falls 3. Technological change supply curve explain as 1. The relationship between price and supply 2. The relationship between price and demand 3. The relationship between price and profit 48 / 99 MICRO Economics Questions If tax rate increase than what happen to supply 1. Supply line will Extended 2. Supply line Contracted 3. Supply line shift leftward 4. Supply line will shift rightward 49 / 99 MICRO Economics If population increase than supply line 1. Extension 2. contraction 3. Rightward shift 4. Leftward shift What will best explain a shift in the market supply curve to right 1. An advertisement successful promote the good 2. A new technique makes it cheaper to produce 3. The government introduce new tax 4. The price of raw materials increase 50 / 99