P2Session 3 SUPPLY CONCEPTS

Key Concepts Definition of supply. Determinants of individual (a producer’s or firm’s) supply. The supply function. The law of supply. The supply schedule. The supply curve. Market supply. Supply and marginal cost Producer surplus Minimum supply price

Supply If a firm supplies a good or service, then the firm: Has resources and technology to produce it, can make profit, plans to produce and sell it. Resources and technology are the constraints (remember scarcity?) that limit what can be produced. Supply reflects what technologically feasible goods to produce. The quantity supplied of a good or service is the amount that producers plan to sell during a given time period at a particular price.

Supply The Law of Supply The law of supply states: Other things remaining the same (ceteris paribus the determinants of supply), the higher the price of a good, the greater is the quantity supplied and vice-versa.

Supply The law of supply results from the general tendency for the marginal cost of producing a good or service to increase as the quantity produced increases. Producers are willing to supply only if they at least cover their marginal cost of production (hence, P=MC).

Supply Supply Curve and Supply Schedule The term supply refers to the entire relationship between the quantity supplied and the price of a good. The supply curve shows the relationship between the quantity supplied of a good and its price when all other influences on producers’ planned sales remain the same.

Supply Figure 3.4 shows a supply curve of recordable compact discs (CD-Rs). A rise in the price, other things remaining the same, brings an increase in the quantity supplied. The supply curve slopes upwards.

Supply A supply curve is also a minimum-supply- price curve. The greater the quantity produced, the higher is the price that a firm must be offered to be willing to produce that quantity. Willingness to produce measures marginal cost (hence, P=MC).

Individual Supply and Market Supply The individual supply of a good is the relationship between the price of the good and the quantity supplied by one producer. The market supply of a good is the relationship between the price of the good and total (market) quantity supplied of that good. To obtain the market supply we sum (horizontally) the supply curves of the individual producers.