Supply

(Lecture Notes)

Supply - the number of units of a good that sellers are willing to place on the market at various alternative prices, per unit of time, other things constant.

Note:

Note the parallels between the definition of demand and that of supply:

“per unit of time” - (stock/flow?)

“other things constant” - explicit acknowledgement that the amount of a good placed on the market depends not only on price. There are other influencing factors.

“various alternative prices” - vary the price of the good, observe how sellers react.

And how do sellers react?

The higher the price of the good (again, other things the same) the more advantageous it is for the seller, and so sellers will place more of the good on the market at higher prices, less at lower prices.

Thus,

Q_x ^s = f ( P_x , ….

Graphically,

And what about the “other things”?

Note: Keep in mind here that the “other things” relative to supply are other (non-price) factors that affect seller behavior—not buyers.

Generally, anything that affects cost of production (or cost of getting the good to market) will influence seller decisions. A few:

Price of resources—What if labor costs increase? How will this affect sellers’ willingness to place a good on the market? Similarly, if capital costs or land use costs vary, this will affect seller willingness to provide a good. Let P denote resource prices.

Technology - Improvements in technology clearly affect cost of production. So if the technology involved in producing/supplying a good improves, then the seller will be willing to put more of the good on the market over a whole range of prices.

Obvious examples???

Price of seller substitute goods -

Note: Here it is important to think in terms of the seller side of the market, not from the buyer side.

How can a good be a seller substitute? Ask yourself, when does the seller have the choice as to whether he/she sells Good A or Good B.

Examples????

Thus, if we are looking at the market relative to Good W:

Now the price of Good Z, a seller substitute, plummets. How will sellers of Good W react?

Supply vs. quantity supplied

Again, the parallels hold.

The term “supply” refers to the entire supply curve, the amount that sellers will place on the market at all different prices. Changes in price are built into the curve—so a change in the price of the good itself will not shift the curve.

What will shift the supply curve?

Burn into brain: The supply curve will shift (that is, there will be a change in supply) if and only if one of the “other things” (non-price determinants of supply) changes.

And what about quantity supplied? That refers to a point on the supply curve, the amount that sellers will place on the market at a particular price, as opposed to all different prices.

How would we illustrate a change in quantity demanded on a graph?

It would be a movement along a given supply curve, not a shift. And what causes such a movement along???

a change in the price of the good