Chapter 2 Supply P42-45 Chapter 2 Supply P42-45. SUPPLY The relationship between supply and priceThe relationship between supply and price The supply.

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Presentation transcript:

Chapter 2 Supply P42-45 Chapter 2 Supply P42-45

SUPPLY The relationship between supply and priceThe relationship between supply and price The supply curveThe supply curve

The supply curve: The supply of potatoes (monthly)

Price (pence per kg) Quantity (tonnes: 000s) Supply a P 4 Q 100 a Market supply of potatoes (monthly)

Price (pence per kg) Quantity (tonnes: 000s) Supply a b P 4 8 Q abab Market supply of potatoes (monthly)

Price (pence per kg) Quantity (tonnes: 000s) Supply a b c P Q abcabc Market supply of potatoes (monthly)

Price (pence per kg) Quantity (tonnes: 000s) Supply a b c d P Q abcdabcd Market supply of potatoes (monthly)

Price (pence per kg) Quantity (tonnes: 000s) Supply a b c d e P Q abcdeabcde Market supply of potatoes (monthly)

Price (pence per kg) Quantity (tonnes: 000s) Supply a b c d e P Q abcdeabcde Market supply of potatoes (monthly)

Price (pence per kg) Quantity (tonnes: 000s) Supply a b c d e P Q abcdeabcde Supply Curve Slopes Upwards

The supply curve Why did we draw this as upward sloping?Why did we draw this as upward sloping? –supply curves generally slope upwards since as a general rule producers are willing to supply more as price people are preparedy to pay rises Thus, the Quantity Supplied rises as the Price risesThus, the Quantity Supplied rises as the Price rises

Price (pence per kg) Quantity (tonnes: 000s) Supply a b c d e P Q abcdeabcde P Up Q S Up Supply

Supply Curve Quantity Supplied rises as Prices rises so Change in Quantity is Positive when Change in Price is PositiveQuantity Supplied rises as Prices rises so Change in Quantity is Positive when Change in Price is Positive Thus:Thus: –we say that Supply is a Positive Function of Price Q S =f(P)Q S =f(P) Means Supply Curve slopes UpMeans Supply Curve slopes Up

SUPPLY SO:SO: The supply curve slopes upwards Ceteris ParibusThe supply curve slopes upwards Ceteris Paribus So What is being held constant here?So What is being held constant here?

SUPPLY Other determinants of supplyOther determinants of supply –Price of inputs / costs of production –Capital (K ) price: r –Labour (L) price: w –Raw Materials (Oil, Materials Etc) P m So Q S =f(P) can be generalised toSo Q S =f(P) can be generalised to Q S =f(P, r,w, P m,……. )Q S =f(P, r,w, P m,……. )

EVEN MORE Determinants of Supply PricePrice Price of InputsPrice of Inputs TechnologyTechnology Profitably of Alternative ProductsProfitably of Alternative Products –Price of good x rises, switch from supplying good y Profitably of goods in joint supplyProfitably of goods in joint supply –Steaks and Cheap Cuts of Mince and Offal Strikes, Nature, Random ShocksStrikes, Nature, Random Shocks

SUPPLY Q S =f(P, r,w, P m,……. )Q S =f(P, r,w, P m,……. ) Note: when we drew the diagram we graphed Q S against P. So P is the ENDOGENOUS variable.Note: when we drew the diagram we graphed Q S against P. So P is the ENDOGENOUS variable. r,w,P m are not explicitly in the diagram so they are the EXOGENOUS variables.r,w,P m are not explicitly in the diagram so they are the EXOGENOUS variables.

SUPPLY Movements along and shifts in the supply curveMovements along and shifts in the supply curve Again a change in Price (the endogenous variable) causes movements along the demand curveAgain a change in Price (the endogenous variable) causes movements along the demand curve Q S =f(P, r,w, P m,……. )Q S =f(P, r,w, P m,……. )

Price (pence per kg) Quantity (tonnes: 000s) Supply a b c d e Movement Along the Supply Curve

Shifts in SUPPLY A change in an Exogenous variable causes shifts in the supply curveA change in an Exogenous variable causes shifts in the supply curve Q S =f(P, r,w, P m,……. )Q S =f(P, r,w, P m,……. )

P QO S 0 =f(P) Shifts in the supply curve

P QO S0S0 S1S1 Increase Shifts in the supply curve: An improvement in Technology

P QO S2S2 S0S0 Decrease Shifts in the supply curve: P m goes up, e.g. Oil

P QO S2S2 S0S0 S1S1 Tech. Improves Increase Oil Price UP Decrease Shifts in the supply curve

So now have drawn a demand curveSo now have drawn a demand curve And a supply curveAnd a supply curve Where do we go from here?Where do we go from here? We use the information we have to determine the price that obtains in the market and hence the quantity demanded and suppliedWe use the information we have to determine the price that obtains in the market and hence the quantity demanded and supplied