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    3.2 Supply – Principles of Economics

    3.2 SUPPLY

    Learning Objectives

    Define the quantity supplied of a good or service and illustrate it using a supply schedule and a supply curve.

    Distinguish between the following pairs of concepts: supply and quantity supplied, supply schedule and supply curve, movement along and shift in a supply curve.

    Identify supply shifters and determine whether a change in a supply shifter causes the supply curve to shift to the right or to the left.

    What determines the quantity of a good or service sellers are willing to offer for sale? Price is one factor; ceteris paribus, a higher price is likely to induce sellers to offer a greater quantity of a good or service. Production cost is another determinant of supply. Variables that affect production cost include the prices of factors used to produce the good or service, returns from alternative activities, technology, the expectations of sellers, and natural events such as weather changes. Still another factor affecting the quantity of a good that will be offered for sale is the number of sellers—the greater the number of sellers of a particular good or service, the greater will be the quantity offered at any price per time period.

    Price and the Supply Curve

    The quantity supplied of a good or service is the quantity sellers are willing to sell at a particular price during a particular period, all other things unchanged. Ceteris paribus, the receipt of a higher price increases profits and induces sellers to increase the quantity they supply.

    In general, when there are many sellers of a good, an increase in price results in an increase in quantity supplied, and this relationship is often referred to as the law of supply. We will see, though, through our exploration of microeconomics, that there are a number of exceptions to this relationship. There are cases in which a higher price will not induce an increase in quantity supplied. Goods that cannot be produced, such as additional land on the corner of Park Avenue and 56th Street in Manhattan, are fixed in supply—a higher price cannot induce an increase in the quantity supplied. There are even cases, which we investigate in microeconomic analysis, in which a higher price induces a reduction in the quantity supplied.

    Generally speaking, however, when there are many sellers of a good, an increase in price results in a greater quantity supplied. The relationship between price and quantity supplied is suggested in a supply schedule, a table that shows quantities supplied at different prices during a particular period, all other things unchanged. Figure 3.8 “A Supply Schedule and a Supply Curve” gives a supply schedule for the quantities of coffee that will be supplied per month at various prices, ceteris paribus. At a price of $4 per pound, for example, producers are willing to supply 15 million pounds of coffee per month. A higher price, say $6 per pound, induces sellers to supply a greater quantity—25 million pounds of coffee per month.

    Figure 3.8 A Supply Schedule and a Supply Curve

    The supply schedule shows the quantity of coffee that will be supplied in the United States each month at particular prices, all other things unchanged. The same information is given graphically in the supply curve. The values given here suggest a positive relationship between price and quantity supplied.

    A supply curve is a graphical representation of a supply schedule. It shows the relationship between price and quantity supplied during a particular period, all other things unchanged. Because the relationship between price and quantity supplied is generally positive, supply curves are generally upward sloping. The supply curve for coffee in Figure 3.8 “A Supply Schedule and a Supply Curve” shows graphically the values given in the supply schedule.

    A change in price causes a movement along the supply curve; such a movement is called a change in quantity supplied. As is the case with a change in quantity demanded, a change in quantity supplied does not shift the supply curve. By definition, it is a movement along the supply curve. For example, if the price rises from $6 per pound to $7 per pound, the quantity supplied rises from 25 million pounds per month to 30 million pounds per month. That’s a movement from point A to point B along the supply curve in Figure 3.8 “A Supply Schedule and a Supply Curve”.

    Changes in Supply

    When we draw a supply curve, we assume that other variables that affect the willingness of sellers to supply a good or service are unchanged. It follows that a change in any of those variables will cause a change in supply, which is a shift in the supply curve. A change that increases the quantity of a good or service supplied at each price shifts the supply curve to the right. Suppose, for example, that the price of fertilizer falls. That will reduce the cost of producing coffee and thus increase the quantity of coffee producers will offer for sale at each price. The supply schedule in Figure 3.9 “An Increase in Supply” shows an increase in the quantity of coffee supplied at each price. We show that increase graphically as a shift in the supply curve from S1 to S2. We see that the quantity supplied at each price increases by 10 million pounds of coffee per month. At point A on the original supply curve S1, for example, 25 million pounds of coffee per month are supplied at a price of $6 per pound. After the increase in supply, 35 million pounds per month are supplied at the same price (point A′ on curve S2).

    Source : open.lib.umn.edu

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    The Sick State Of HEALTH CARE

    Our pedestrian's guide to the economy would be remiss if we failed to stroll past the Shady Valley Memorial Hospital and my very own physician's place of business, the Dr. Dowrimple T. Bedside Family Clinic, to examine the considerable controversy over health care. A debate has raged for years over health care in the United States, including, but not limited to, the quality of services, their cost, their slice of the economic pie, who pays, who doesn't, and who should.

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    Supply and the determinants of supply (article)

    ##Key Terms Term | Definition -|- **supply** | a schedule or a curve describing all the possible quantities that sellers are willing and able to produce, at all possible prices they might encounter in a particular period of time; supply is represented in a graphical model as the entire supply curve. **law of supply** | all other factors being equal, there is a direct relationship between a good’s price and the quantity supplied; as the price of a good increases, the quantity supplied increases; similarly, as price decreases, the quantity supplied decreases, leading to a supply curve that is always upward sloping. **quantity supplied** | the amount of a good or service that sellers are willing to sell at a specific price; quantity supplied is represented in a graphical model as a single point on a supply curve. **change in quantity supplied** | a movement along a supply curve resulting from a change in a good’s price **change in supply** | a movement or shift in an entire supply curve resulting from a change in one of the non-price determinants of supply **determinants of supply** | changes in non-price factors that will cause an entire supply curve to shift (increasing or decreasing market supply); these include 1) the number of sellers in a market, 2) the level of technology used in a good’s production, 3) the prices of inputs used to produce a good, 4) the amount of government regulation, subsidies or taxes in a market, 5) the price of other goods sellers could produce, and 6) the expectations among producers of future prices.

    Supply

    Lesson summary: Supply and its determinants

    In this lesson summary review and remind yourself of the key terms, graphs, and calculations used in the analysis of supply. Topics include the distinction between supply and quantity supplied, the law of supply, and the determinants of supply.

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    The law of supply

    The law of supply states that there is a positive relationship between price and quantity supplied, leading to an upward-sloping supply curve. Sellers like to make money, and higher prices mean more money!

    For example, let’s say that fishermen notice the price of tuna rising. Because higher prices will make them more money, fishermen spend more time and effort catching tuna. As a result, as the price rises, the quantity of tuna supplied increases.

    The determinants of supply

    Factors that influence producer supply cause the market supply curve to shift. For example, one of the determinants of supply in the market for tuna is the availability and the price of fishing permits. If more fishing permits are made available and the permit fee is lowered, we can expect more fisherman to enter the market; as a result, the supply of tuna will likely increase. Now, at every price, a greater quantity of tuna will be supplied to the market.

    Key Terms

    Term Definition

    supply a schedule or a curve describing all the possible quantities that sellers are willing and able to produce, at all possible prices they might encounter in a particular period of time; supply is represented in a graphical model as the entire supply curve.law of supply all other factors being equal, there is a direct relationship between a good’s price and the quantity supplied; as the price of a good increases, the quantity supplied increases; similarly, as price decreases, the quantity supplied decreases, leading to a supply curve that is always upward sloping.quantity supplied the amount of a good or service that sellers are willing to sell at a specific price; quantity supplied is represented in a graphical model as a single point on a supply curve.change in quantity supplied a movement along a supply curve resulting from a change in a good’s pricechange in supply a movement or shift in an entire supply curve resulting from a change in one of the non-price determinants of supplydeterminants of supply changes in non-price factors that will cause an entire supply curve to shift (increasing or decreasing market supply); these include 1) the number of sellers in a market, 2) the level of technology used in a good’s production, 3) the prices of inputs used to produce a good, 4) the amount of government regulation, subsidies or taxes in a market, 5) the price of other goods sellers could produce, and 6) the expectations among producers of future prices.

    Key Graphical Models

    The supply curve demonstrates the relationship between a good’s price and the quantity producers are willing and able to supply. The upward sloping line demonstrates this direct relationship: as the price rises, the quantity supplied increases; as price decreases, quantity supplied decreases.

    P P Q Q Supply Supply

    Figure 1: An upward sloping supply curve

    Common Misperceptions

    You may often hear people say, incorrectly, that higher prices lead to “more supply” and that lower prices lead to “less supply.” However, this is an incorrect use of the terms. Higher prices will result in an increased quantity supplied and lower price will result in a decrease in quantity supplied. Only a change in a non-price determinant of supply causes a good's supply to increase or decrease.

    Discussion questions

    How would producers of a good, such as candy canes, adjust their current supply if they expect its price to rise in the future? [Explain]

    How will increased regulation of producers by the government affect a good’s supply? What other government interferences in a market can influence the level supply of a good? [Explain]

    In a correctly labelled graph, show an increase in the supply of a good. In another, correctly labelled graph, show an increase in the quantity supplied of a good. Explain why these two are different.

    Supply

    Law of supply

    Factors affecting supply

    Change in supply versus change in quantity supplied

    Lesson summary: Supply and its determinants

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    Practice: Supply Next lesson

    Market equilibrium, disequilibrium, and changes in equilibrium

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    Want to join the conversation?

    Log in DrumletNation 3 years ago

    Posted 3 years ago. Direct link to DrumletNation's post “What is a method for me t...”

    What is a method for me to better remember the different detriments of supply?

    • Aryan S 3 years ago

    Posted 3 years ago. Direct link to Aryan S's post “Well, you will have to le...”

    Well, you will have to learn them by heart and there is unfortunately no way around that. But, there are numerous mnemonics out there.

    For example, the mnemonic PINTS WC:

    P-Productivity I-Indirect Taxation N-Number of firms T-Technology S-Subsidies W-Weather C-Cost

    Source : www.khanacademy.org

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