Supply Theory

Lecture 4
Supply Theory
Supply
▪ Law of supply
▪ Quantity supplied
▪ Supply schedule
▪ Supply curve
▪ Determinants of supply
The Basic Decision-Making Units
▪ A firm is an organization that transforms

resources (inputs) into products (outputs). Firms
are the primary producing units in a market
economy.
▪ An entrepreneur is a person who organizes,
manages, and assumes the risks of a firm, taking
a new idea or a new product and turning it into a
successful business.
▪ Households are the consuming units in an
economy.
The Circular Flow of Economic Activity
▪ The circular flow of economic

activity shows the
connections between firms
and households in input and
output markets.
Input Markets and Output Markets
▪ Output, or product, markets

are the markets in which
goods and services are
exchanged.
▪ Input markets are the
markets in which
resources—labor, capital,
and land—used to produce
• Payments flow in the opposite
direction as the physical flow of
products, are exchanged.
resources, goods, and services
(counterclockwise).
Input Markets
Input markets include:

▪ The labor market, in which households supply work
for wages to firms that demand labor.
▪ The capital market, in which households supply their
savings, for interest or for claims to future profits, to
firms that demand funds to buy capital goods.
▪ The land market, in which households supply land or
other real property in exchange for rent.
Supply definition
§ What is Supply?
§ Supply is the quantity of a goods or
services a firm is willing to produce at
all prices.
§ What is the law of Supply?
§ If nothing else changes, firms are
willing to supply a greater quantity of
good or service at higher prices than
lower.
The Law of Supply
As the price rises,
the quantity
supplied rises.
The law of supply states that there is a positive relationship between

price and quantity of a good supplied.
This means that supply curves typically have a positive slope.
Supply
Price Quantity Supply of ____
6
$5 50 5
4
$4 40
Price
3
$3 30 2
1
$2 20 0
10 20 30 40 50
$1 10 Quantity
• A supply curve is a graph illustrating how much
of a product a firm will supply at different prices.
Determinants of Supply
▪ Input prices
▪ Technology
▪ Expectations
▪ Number of sellers
Factors that will cause a shift in supply (decrease or
increase)
▪ Productivity (Improvements in machines and production
processes of a good or service)
▪ Inputs ( Change in the price of inputs required to produce the
good or service.)
▪ Government Actions (Subsidies, Taxes and Regulations)
▪ Technology (Improvements in machines and production

processes of a good or service)
▪ Outputs ( Price changes in other products produced by the
firm)
▪ Expectations (outlook of future prices and profits)
▪ Size of Industry (Number of firms in the industry)
Shifting Supply
A Change in Supply Versus
a Change in Quantity Supplied
• A change in supply is not the

same as a change in quantity
supplied.
• In this example, a higher price

causes higher quantity
supplied, and a move along
the demand curve.
• In this example, changes in determinants of supply, other than price, cause an

increase in supply, or a shift of the entire supply curve, from SA to SB.
• When supply shifts to the

right, supply increases. This
causes quantity supplied to
be greater than it was prior to
the shift, for each and every
price level.
To summarize:
Change in price of a good or service

leads to
Change in quantity supplied

(Movement along the curve).
Change in costs, input prices, technology, or prices of related goods and

services
leads to
Change in supply
(Shift of curve).
From Individual Supply
to Market Supply
▪ The supply of a good or service can be defined for an

individual firm, or for a group of firms that make up
a market or an industry.
▪ Market supply is the sum of all the quantities of a
good or service supplied per period by all the firms
selling in the market for that good or service.
Market Supply
▪ As with market demand, market supply is the

horizontal summation of individual firms’ supply
curves.
Market Equilibrium
▪ The operation of the market depends on the

interaction between buyers and sellers.
▪ An equilibrium is the condition that exists when
quantity supplied and quantity demanded are
equal.
▪ At equilibrium, there is no tendency for the
market price to change.
Market Equilibrium
▪ Only in equilibrium is
quantity supplied
equal to quantity
demanded.
• At any price level

other than P0, the
wishes of buyers
and sellers do not
coincide.
Market Disequilibria
▪ Excess demand, or
shortage, is the condition
that exists when quantity
demanded exceeds quantity
supplied at the current
price.
• When quantity demanded
exceeds quantity supplied, price
tends to rise until equilibrium is
restored.
Market Disequilibria
▪ Excess supply, or surplus, is

the condition that exists
when quantity supplied
exceeds quantity demanded
at the current price.
• When quantity supplied exceeds

quantity demanded, price tends to
fall until equilibrium is restored.
Increases in Demand and Supply
§ Higher demand leads to higher § Higher supply leads to lower

equilibrium price and higher equilibrium price and higher
equilibrium quantity. equilibrium quantity.
Decreases in Demand and Supply
§ Lower demand leads to § Lower supply leads to

lower price and lower higher price and lower
quantity exchanged. quantity exchanged.
Relative Magnitudes of Change
• The relative magnitudes of change in supply and demand determine the

outcome of market equilibrium.
Relative Magnitudes of Change
• When supply and demand both increase, quantity will increase, but
price may go up or down.
The End

Supply Theory

Uploaded by

Copyright:

Available Formats

Supply Theory

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Supply Theory

Uploaded by

Copyright:

Available Formats

Lecture 4

▪ A firm is an organization that transforms

▪ The circular flow of economic

▪ Output, or product, markets

Input markets include:

As the price rises,

The law of supply states that there is a positive relationship between

▪ Technology (Improvements in machines and production

• A change in supply is not the

• In this example, a higher price

• In this example, changes in determinants of supply, other than price, cause an

• When supply shifts to the

Change in price of a good or service

Change in quantity supplied

Change in costs, input prices, technology, or prices of related goods and

▪ The supply of a good or service can be defined for an

▪ As with market demand, market supply is the

▪ The operation of the market depends on the

• At any price level

▪ Excess supply, or surplus, is

• When quantity supplied exceeds

§ Higher demand leads to higher § Higher supply leads to lower

§ Lower demand leads to § Lower supply leads to

• The relative magnitudes of change in supply and demand determine the

You might also like