Unit 2 Microeconomic(supply)
Definition
Supply is defined as the quantity of a good or service that producers are willing and able to offer at various prices during a specific time period, ceteris paribus
Types of supply
Individual
Market
The individual supply is the supply of one product from one firm at every price.
The market supply is the sum of all the individual supplies of a product at every price.
Law of supply
As the price of a good rises, the quantity supplied will usually rise, ceteris paribus. (& vise versa)
There is a DIRECT (or positive) relationship between price and quantity supplied
The Law of Supply occurs for two main reasons.
Law of Diminishing Marginal Returns
Increasing Marginal Cost of Production
Too many cooks in the kitchen! Must charge more because returns decrease.
The law of diminishing marginal returns states that adding more of one factor of production, while holding at least one other factor of production constant, will at some point yield lower marginal returns (output/product).
Marginal returns refers to the additional output gained from adding an additional unit of input to a production process.
Therefore, to make more they must charge a higher price.
A producer will only want to increase the quantity supplied if she can receive a higher price in the market for selling the product.
Marginal cost refers to the cost of producing one more unit of a good.
Movements and Shifts on the Supply Curve
Changes to the Supply Curve
Change in Quantity Supplied
Change in Supply
Any change in price of a product simply moves ALONG the supply curve
The entire supply curve shifts
Something other than price has caused a change to the supply curve
Technical Term: Non-Price Determinant of Supply
Example: Costs of Production
Change in Quantity Supply
Increased in quantity supplied
Change in supply
Change in NON-PRICE determinant
6 Supply Shifters
1.Costs of Production
Change in the cost of factors of production (FOPs) of the goods or services that firms produce is a very important factor influencing the supply.
2.Technology
3.Number of Firms/Sellers
Improvements in a firm or industry's technology can increase the supply of a good or service by increasing productivity – the quantity of output per unit of input.
As the market supply is the sum of all the individual supplies of a product, when the number of firms that offer the same good increases, the market supply also increases, shifting the supply curve of that good outwards (to the right).
4.Future Expectations
Expectations about the future can also affect the supply for goods and services.
Future Price
Future Economy
If firms expect prices of the products they sell to increase in the near future, they might withhold part of their current production from the market (by not offering it for sale and storing it, also called hoarding ) in the hope of being able to sell more at a higher price in the future .
If producers expect the economy to do well, they will expect that people will have more money to spend and that the consumption of goods and services will increase.
5.Price of Related Goods
Just as consumers have the choice of what alternative good to purchase when the price of one changes, producers have a choice as to what good to produce.
Joint Supply
Competitive supply
when two or more goods are derived from the same product, so that it is not possible to produce more of one without producing more of the other. The second good is often called a by-product
when the production of two goods uses similar resources and processes. When a supplier produces more of one good, it means producing less of the other.
6.Government Intervention
Governments intervene in markets to change supply in order to achieve goals associated with the price or quantity of goods in markets. The most common methods of government intervention are regulations, indirect taxes and subsidies.
Subsidies
Regulation
Taxes (Indirect)
A tax imposed on a good or service. When indirect taxes are imposed or increased, the costs of production for firms increase, causing supply to decline
An amount of money granted by the government to a firm or industry. Subsidies have the opposite effect of a tax. When the government gives a subsidy to a firm it reduces the firm’s costs of production, increasing the supply
A regulation is a rule made by the government that requires certain behavior of individuals, firms or other groups. These rules and requirements usually increase the costs of production for firms.