CH # 5 Supply Analysis 1

MICRO Economics Supply 2 / 99  تجزيه‌ وتحليل‌ عرضه

MICRO Economics TERMS TO KNOW: Meaning of supply and Stock 1 Law of supply, schedule and Diagram 2 Changes in supply 3

MICRO Economics What is Supply?  Supply is the willingness and ability of sellers to produce and offer to sell different quantities of a good at different prices during a specific time period. 4 / 99

MICRO Economics  Supply  Supply means the quantities of a commodity offered for sale at a given price.  Stock  Stock means the total quantity of a commodity which a seller has with him in warehouse and has not yet brought for sale.  Supply and Stock: عرضه ذخيره

MICRO Economics Firm’s Supply Curve and Market Supply Curve  A firm’s supply curve is a supply curve for that particular firm  A market supply curve is the sum of all firm’s supply curves. 6 / 99

MICRO Economics Reserve price  This the minimum price which a seller does not want to sell any quantity.  For example, a person is selling chairs and minimum price is the 500 AF, less than this price seller is not his chairs, its called reserve price.  That depend upon on product nature and circumtanceses. 7 / 99

MICRO Economics Supply types Very short supply Short supplyLong supply 8 / 99

MICRO Economics 1.Very short supply  Refers to day to day to market supply. This kind of supply is fixed and can not be increased suddenly and also perishable goods. 9 / 99

MICRO Economics Short Supply  Refers to such period of time which is enough to make adjustment by sellers to respond to price change. However, the time available is not very long. So, it is possible to manage supply within short time says 2 or 3 days. 10 / 99

MICRO Economics Long period supply  Long period supply means that firm and industry having enough time to adjust his supply according to demand of peoples in future, long period supply all factors of production are variables, producers can change labor, land, capital within that time 11 / 99

MICRO Economics  LAW OF SUPPLY The law of supply states that, other factors remaining the same, when the price of a particular commodity rises, its quantity supplied (Q s ) also rises and and decreases with fall in price.. There is a direct or positive relationship between the price of a commodity and quantity offered for sale over a specified period of time. عرضه قانون عرضه قانون

MICRO Economics  Schedule and Diagram:  Law of Supply can be explained with the help of the following schedule and a diagram. Price of good (X)Quantity supplied (Qs) Price Qs Supply Line نمودار جدول و

MICRO Economics  The economists classify the changes in supply into two types: I.Movements along the supply curve (supply changes due to change in price): II.Shift of the supply curve (changes in supply due to change in other factors)  Changes in Supply

MICRO Economics  Movement VS Shift in supply  Price Other factors

MICRO Economics Shift in Supply because of following factors  Prices of Resources  Technology  Taxes  Quotas  Number of Sellers  Future Price  Weather  Subsidies 16 / 99

MICRO Economics Prices of Resources  When resource prices fall, sellers are willing and able to produce more of the good and offer it for sale. 17 / 99

MICRO Economics Technology  Technology is the body of skills and knowledge concerning the use or resources in production.  An advancement in technology is the ability to produce more output with a fixed amount of resources.  An advancement in technology can help lower the per-unit cost, which is the average cost of producing the good. 18 / 99

MICRO Economics Taxes  Taxes on production can increase the per-unit costs of producing a good. Taxes cause the supply curve to shift to the left. 19 / 99

MICRO Economics Subsidies  Subsidies are financial payments made by government for certain actions. Subsidies can increase production, causing the supply curve to shift to the right. 20 / 99

MICRO Economics Number of Sellers  The number of sellers can also impact the supply curve. If more sellers begin producing a good, supply increases, shifting the supply curve to the right. 21 / 99

MICRO Economics Future Price  Expectations of future price movements can cause sellers to either increase or decrease the current supply. 22 / 99

MICRO Economics Weather  Think of the effect the weather can have on the supply of agricultural goods such as corn and wheat. 23 / 99

MICRO Economics  Changes in factor prices (cost of production decrease or increase) if COP is decreased so low price & more supply.  Changes in Technique (improved techniques will lower cost of production so more supply)  Improvement in the means of transportation  Climatic changes in case of Agricultural products (if good weather then bumper crops & more supply)  Political changes Determinants of Supply

MICRO Economics  Movements along the supply curve: Changes in Supply (cont’d): P1P1 P2P2 P3P3 Q1Q1 Q2Q2 Q3Q3 Qs a b c extension contraction Price

MICRO Economics  Shift of the supply curve: Changes in Supply (cont’d): Rise Fall Q1Q1 Q2Q2 Qs Q0Q0 P1P1 Price S1S1 S2S2 S0S0

MICRO Economics 27 of 42 Market Effects of Changes in Supply Changes in Supply Shift the Supply Curve An increase in supply shifts the supply curve to the right when: A decrease in supply shifts the supply curve to the left when: The cost of an input decreasesThe cost of an input increases A technological advance decreases production cost The number of firms increasesThe number of firms decreases Producers expect a lower price in the future Producers expect a higher price in the future Product is subsidizedProduct is taxed

MICRO Economics 28 of 42 Key Terms perfectly competitive market perfectly competitive market demand schedule demand schedule individual demand curve individual demand curve quantity demanded quantity demanded law of demand law of demand change in quantity demanded change in quantity demanded market demand curve market demand curve supply schedule supply schedule quantity supplied quantity supplied change in quantity supplied change in quantity supplied market supply curve market supply curve market equilibrium market equilibrium excess demand excess demand excess supply excess supply change in demand change in demand normal good normal good substitute good substitute good complementary good complementary good inferior good inferior good change in supply change in supply

MICRO Economics MARKET EQUILIBRIUM (Demand and supply)

MICRO Economics  DEMAND: The quantity of a commodity or service consumer wanted to buy at a specified price and time.  SUPPLY It is the amount of a commodity that sellers are able and willing to offer for sale at different prices per unit of time.

MICRO Economics Equilibrium  The equilibrium is a market situation in which demand for a product becomes equal to the supply of the product.  The equilibrium price is the price at which the quantity of a good demanded in a given time period equals the quantity supplied.

MICRO Economics  The price of the commodity in the market is determined by the inter-section of the forces of demand and supply. The price at which demand and supply are equal, is known as an equilibrium price.  The quantity bought and sold at this equilibrium price is known as equilibrium output or amount. Price Equilibrium

MICRO Economics PRICEQS(SUPPLY)QD(DEMAND)MARKET D>S D>S 1530 D=S D<S D<S EQUILIBRIUM

MICRO Economics GRAPHICAL EQUILIBRIUM PRICE =15 QD=QS 30 equilibrium demand supply

MICRO Economics Market Surplus  A market surplus is the amount by which the quantity supplied exceeds the quantity demanded at a given price – excess supply.  A market surplus is created when the seller’s asking prices are too high.  When prices are high so demand will go down and ultimately demand and supply equality will be attained.

MICRO Economics Market Shortage  A market shortage is the amount by which the quantity demanded exceeds the quantity supplied at a given price – excess demand.  In market shortage the prices will go up and ultimately will led to more supply.  Thus equilibrium is the situation where both consumers as well as producers are agreed (acceptable situation)and price is settled.

MICRO Economics 37 / D S Price Quantity PEPE QEQE P E and Q E represent the equilibrium price and quantity

MICRO Economics 38 / What is Equilibrium Price?  The price that equates the quantity demanded and the quantity supplied

MICRO Economics 39 / What happens if price is below equilibrium?  A shortage, or  excess demand, arises

MICRO Economics 40 / D S P2P2 QDQD QSQS At P 2, Q D > Q S, thus a shortage or excess demand exists Shortage

MICRO Economics 41 / How is the shortage eliminated?  The price rises, leading to a decrease in quantity demanded and an increase in quantity supplied.

MICRO Economics 42 / What happens if price is above equilibrium?  A surplus, or  excess supply, arises

MICRO Economics 43 / D S P1P1 Surplus 43 QDQD QSQS At P 1, Q D < Q S, thus a surplus or excess supply exists

MICRO Economics 44 / How is the surplus eliminated?  The price falls, leading to a decrease in quantity supplied and an increase in quantity demanded.

MICRO Economics 45 / D S P3P3 Q3Q3 P1P1 Surplus P2P2 Shortage 45 © ©1999 South-Western College Publishing Summary, shortages, surpluses, and equilibrium

MICRO Economics 46 / Summary, supply changes  Increased supply,  price falls, quantity rises  Decreased supply,  price rises, quantity falls

MICRO Economics Objective Questions  Which one is increasing function of price 1.Demand 2.Supply 3.Consumption It describe the law of supply 1.Supply curve 2.Supply equation 3.Supply schedule 47 / 99

MICRO Economics Questions  Supply curve will shift when 1.Price falls 2.Price falls 3.Technological change supply curve explain as 1.The relationship between price and supply 2.The relationship between price and demand 3.The relationship between price and profit 48 / 99

MICRO Economics Questions  If tax rate increase than what happen to supply 1.Supply line will Extended 2.Supply line Contracted 3.Supply line shift leftward 4.Supply line will shift rightward 49 / 99

MICRO Economics  If population increase than supply line 1.Extension 2.contraction 3.Rightward shift 4.Leftward shift What will best explain a shift in the market supply curve to right 1.An advertisement successful promote the good 2.A new technique makes it cheaper to produce 3.The government introduce new tax 4.The price of raw materials increase 50 / 99