Slide 1: Supply slide 1 MODEL OF SUPPLY The model of supply is an attempt to explain the amount supplied of any good or service. SUPPLY DEFINED The amount of a good or service a firm wants to sell, and is able to sell per unit time. Slide 2: Supply slide 2 THE “STANDARD” MODEL OF SUPPLY The DEPENDENT variable is the amount supplied.
The INDEPENDENT variables are:
the good’s own price
the prices of inputs used in its production
the technology of production
taxes and subsidies Slide 3: Supply slide 3 YOU COULD WRITE THE MODEL THIS WAY: The supply function for tacos
QS(tacos) = S(Ptacos, Ptaco shells, Plettuce, Plabor,
Ptomatoes, . . . ,technology, taxes &
subsidies) Slide 4: Supply slide 4 THE SUPPLY CURVE The supply curve for any good shows the quantity supplied at each price, holding constant all other determinants of supply.
The DEPENDENT variable is the quantity supplied.
The INDEPENDENT variable is the good’s own price. Slide 5: Supply slide 5 THE LAW OF SUPPLY The Law of Supply says that an increase in a good’s own price will result in an increase in the amount supplied, holding constant all the other determinants of supply.
The Law of Supply says that supply curves are positively sloped. Slide 6: Supply slide 6 A SUPPLY CURVE A supply curve must look like this, i.e., be positively sloped. own price quantity supplied supply TACO MARKET Slide 7: Supply slide 7 The supply curve means: You pick a price, such a p0, and the supply curve shows how much is supplied. own price quantity supplied supply TACO MARKET If the price of tacos rises, how is the supply curve affected? : Supply slide 8 own price quantity supplied supply p0 Q0 TACO MARKET If the price of tacos rises, how is the supply curve affected? Go to hidden slide Slide 9: Supply slide 9 At a higher price, firms want to sell more. own price quantity supplied supply p0 Q0 TACO MARKET Slide 10: Supply slide 10 AN IMPORTANT POINT When drawing a supply curve notice that the axes are reversed from the usual convention of putting the dependent (y) variable on the vertical axis, and the independent (x) variable on the horizontal axis. Slide 11: Supply slide 11 ECONOMISTS HAVE HYPOTHESES ABOUT HOW CHANGES IN EACH OF THE INDEPENDENT VARIABLES AFFECTS THE AMOUNT SUPPLIED Slide 12: Supply slide 12 Other factors affecting supply The question here is how to show the effects of changes in input prices, technology, and taxes.
The answer, of course, is that changes in input prices, technology, or taxes cause the supply curve to shift. Changes in input prices : Supply slide 13 Changes in input prices Consider the supply of beer, and suppose the price of hops, a crucial input to beer, falls. Beer firms now find that beer production is more profitable than it was before, and they respond to this be increasing the supply of beer. Slide 14: Supply slide 14 The price of hops falls from $300 per ton to $100 per ton. own price quantity supply @ hops price of $300/ton BEER MARKET How will this affect the
supply curve for beer? Go to hidden slide Slide 15: Supply slide 15 This is a change in supply. Beer firms want to sell more beer at each price of beer. own price quantity supply @ hops price of $300/ton BEER MARKET Change in technology : Supply slide 16 Change in technology An improvement in technology makes it possible to produce a level of output with fewer inputs than before.
Because this lowers the cost of production, profits rise, and firms will try to supply more. Slide 17: Supply slide 17 own price quantity supply @ old technology BEER MARKET Suppose beer technology improves. How does this affect
the supply curve for beer? Go to hidden slide Slide 18: Supply slide 18 own price quantity supply @ old technology BEER MARKET There is an increase in supply. The supply
curve shifts to the right Slide 19: Supply slide 19 price Q S (no tax) How would you suspect an excise tax affects the supply of a good? Go to hidden slide Slide 20: Supply slide 20 price Q S (no tax) How would you suspect an excise tax affects the supply of a good? Supply summary : Supply slide 21 Supply summary Supply is a function of own price, input prices, and technology.
The supply curve shows supply as a function of own price, all else constant.
Changes in a good’s own price show up as movements along a supply curve.
Changes in input prices, technology, or taxes show up as shifts in the supply curve.