©2011 John M. Abowd and Jennifer P. Wissink, all rights reserved. The Supply Function Dr. Jennifer P. Wissink ©2011 John M. Abowd and Jennifer P. Wissink, all rights reserved.

The Supply Function We will consider the market for compact disc players. Recall that we will define the following for our market: The type and style of CD players. The quality of the CD players. All other attributes of the generic CD player. A time frame that applies to our market for CD players. Suppliers are the sellers of CD players. The CD player market is a perfectly competitive market.

The Supply Function The supply function for X: QXS = g(PX, Pfop, Poc, S&T, N) Where X refers to CD players and: QXS = maximum quantity that sellers are willing and able to sell PX = X’s price Pfop = the prices of factors of production Poc = the opportunity costs S&T = science and technology N = number of firms in the market

The Supply Curve (Verbal) The supply curve, a.k.a. supply, describes the relation between a good’s price and the maximum quantity that sellers are willing and able to put on the market for sale at that price, ceteris paribus. Ceteris paribus means holding all the other supply function variables constant at some given level. QXS = g(PX) given Pfop, Poc, S&T, N The “The Law of Supply” the relationship between a good’s price and the quantity supplied of the good is positive. higher prices generate higher quantities supplied lower price generate lower quantities supplied Example: Suppose PX falls from $25 to $10, then the quantity supplied might fall from, say, QX=31 to QX=16. This is referred to as a “change in quantity supplied” and in this case a “decrease in quantity supplied.” “Own-price” changes  movements along a given supply curve, i.e., changes in quantity supplied.

The Supply Curve (Graph) QXS = g(PX) Note: Law of Supply implies a positive or upward slope to the graph. Note: In the graph we switched the axes…, again. Price Quantity Supply

Movements vs. Shifts QXS = g(PX) given Pfop, Poc, S&T, N A movement along the supply curve for X would be caused by a change in Px. Remember this is referred to as an increase or decrease in quantity supplied. A shift of the entire supply curve would be caused by a change in one of the “ceteris paribus” supply variables. This would be referred to as an increase or decrease in supply.

Movements: A Change (e.g., decrease) in the Quantity Supplied A change in the quantity supplied is a movement along the supply curve. Price Quantity Supply 25 31 At price = $25, the quantity supplied = 31. At price = $10, the quantity supplied = 16. 16 10

Shifts: Increases & Decreases In Supply When supply increases, the quantity supplied by producers increases at every price. Example: when supply increases, the quantity supplied at a price of $25 rises from 31 to 36. When supply decreases, the quantity supplied by producers falls at every price. Example: when supply decreases, the quantity supplied at a price of $25 falls from 31 to 21.

Shifts: Increase In Supply An increase in supply is a rightward shift in the entire curve. More is supplied at every price Price Quantity Supply New Supply 25 31 36

Shifts: Decrease In Supply A decrease in supply is a leftward shift in the entire curve. Less is supplied at every price Price 25 Quantity Supply 21 New Supply 31

Movements vs. Shifts: Getting It Right Recall: QXS = g(PX) given Pfop, Poc, S&T, N Consider what happens when: Px changes  movement along supply curve based on the law of supply Px up  QxS rises; Px down  QxS falls Pfop changes  shift in supply Pfop up  decrease in supply of X; Pfop down  increase in supply of X Poc changes  shift in supply Works the same as above for changes in Pfop S&T changes  shift in supply S&T advancements  increase in supply of X; S&T setbacks  decrease in supply of X N changes  shift in supply N up  increase in supply of X; N down  decrease in supply of X

The Supply Curve (Equation) A linear supply curve from the points we’ve used. QXS = 6 + PX Law of Supply? yes! Beware: the graph we draw is the inverse of the equation we write (most times). P S 25 31 6 Q

Another Supply Curve (Equation) A linear supply curve from another market. QS = -15 + 3P The equation we graph is the inverse. Rearranging we get: 3PxS = 15 + Qx PxS = 5 + 1/3Qx P S $5 Q

Final Supply Remarks We have constructed the supply function for the market for CD players. Notes: Not all supply curves are linear. Later in the course, we will develop the supply function from a more basic model of firm behavior. The supply side of the market “scissors” is only half the story. The other is the demand function.