SUPPLY HOW MUCH SHOULD I MAKE?

REVIEW A supply curve illustrates how much of a good would be supplied or produced at each possible price. (Coffee shop labor example.)

REVIEW The law of supply states that as prices increase, sellers are willing and able to sell more of a good – therefore the quantity supplied increases. As prices fall, the sellers are not able or willing to sell as much, and the quantity supplied decreases. griculture/as-prices-fall-strawberry-farmers- plow-crops-under/

MOVEMENT ALONG THE SUPPLY CURVE VS. SHIFTS IN THE SUPPLY CURVE Just like with demand, there is an important distinction between movement ALONG the supply curve and a SHIFT in the entire supply curve itself. (I will try and trick you on this!)

SUPPLY SHIFTERS There are 5 broad changes that will shift the curve itself: (These are intuitive…think about decisions you would make to maximize profit.) 1.A change in the cost of production 2.A change in technology 3.A change in the number of producers 4.A change in the prices of alternatives using the same resources 5.A change in producers’ expectations about price

COSTS OF PRODUCTION The resources that are used to produce a good affect its cost. (Increased costs shift the supply curve left, decreased costs shift the curve right.) Changes in price of inputs (inputs = resources used to produce a good) E.g., bakers need flour, yeast, sugar, milk, eggs, and various other supplies to produce their goods. If the price of any of this stuff goes up, it will cost the baker more to make her baked goods. Other examples of inputs?

COSTS OF PRODUCTION – OTHER EXAMPLES Utilizing cheap international (or machine) labor.

COSTS OF PRODUCTION – OTHER EXAMPLES Government policy, including taxes and subsidies E.g. Proposition AA Renewable energy subsidies A shortage of inputs E.g. oil supplies, vaccines, honey bees, etc.

TECHNOLOGICAL CHANGE I mproved technology can make production easier and faster (more efficient), which means that more can be produced at each price. E.g., assembly lines, global supply chains, farming technology, etc. Technological advances increase supply (and shift the supply curve to the right.) When technology is destroyed, supply decreases (shifting the supply curve left.) E.g., war, natural disasters, computer virus, etc.

NUMBER OF PRODUCERS/SELLERS If the number of sellers rises, supply will rise. If the number of sellers decreases, it will decrease. (Too obvious?)

FUTURE EXPECTATIONS ABOUT PRICES Suppliers’ expectations influence production decisions. If a supplier expects the price of her good to rise in the future, she may store some of today’s supply to sell it later and reap higher profits (decreasing supply now; increasing it later.)

PRICE OF ALTERNATIVES Producers’ resources generally have more than one possible use; the same labor, equipment, and skills could be used to produce different goods. E.g., a farmer’s field could be used to grow any number of crops. As the price of wheat increases, the corn farmer will start to consider growing wheat instead. If the farmer does decide to switch his fields to wheat, the supply curve for corn will shift to the left.