1 THE ECONOMIC WAY OF THINKING

2 What is Supply? Where demand addresses the buying side of the market, SUPPLY addresses the selling side Supply is how much of a good or service firms produce or sell Law of Supply: the higher the price of a good, the larger the quantity firms want to produce The amount a firm produces depends on various factors The technological know-how concerning production of the good, the cost and productivity of inputs required for production, expectations, employee-management relations, the goals of firms’ owners, the presence of any government taxes or subsidies, etc…

3 What is a Supply Curve? The supply curve shows the influence of price on a quantity supplied (other factors held constant) In the supply and demand graph, the supply curve slopes upward. Why up? The per-unit opportunity costs rise when more units are produced, so a higher price is necessary for more output. Prices are graphed on the Y-axis Units demanded (quantity) are graphed on the X-axis For each possible price on the Y-axis, the supply curve identifies the sum of the quantities offered for sale by firms

4 Supply Curve

5 What Does This Supply Curve Show? When all else is held constant, it shows that at a price of 20 pence per unit, the quantity supplied will be 100 When all else constant, it shows that at a price of 50 pence per unit, the quantity supplied will be 400 The supply curve summarizes the effect of price on the quantity that firms produce and sell

6 What Changes Supply? The supply curve shows the influence of price on a quantity supplied, when other factors are held constant. When any other factors change, the entire supply curve shifts. (1) Technology: the state of technological knowledge, how goods can be manufactured (2) Conditions of supply input Labor Energy (3) Other factors Government - when it comes to health care Weather - when it comes to agriculture

7 These Same Reasons Shift the Supply Curve Change in Technology Gutenburg invents the printing press in 1436 Supply curve for book production shifts outwards, reflecting an increase in the supply of books Change in Labor General Motors lays off 47,000 employees in 2009 Supply curve for GM car production shifts inwards, reflecting a decrease in the supply of GM cars Change in Energy Petroleum cost more then $100/barrel summer 2008 Change in Weather Drought shrivels up wheat farms in China Feb 2009

8 Shifts in Supply Curve Check out m/interactive/part2.htm m/interactive/part2.htm