Supply is not just the amount of a certain product… Supply is “the willingness AND ability of firms to produce a given quantity of a good or service at a given price over a given time period”

As the price of a good or service rises, firms will produce more of it… as the price decreases, firms will produce less of it, ceteris paribus POSITIVE RELATIONSHIP BETWEEN PRICE AND QUANTITY SUPPLIED

Price of DVDs Qty. Supplied Over One Year $ $ $ $ $ $5.000 Demand Schedule for DVDs

Important terminology point: We call movements along the supply curve “changes in quantity supplied NOT changes in supply – as you saw with demand Price of DVDs Quantity of DVDs Supplied

Profit Maximizing Behavior of Firms since firms seek maximize their profit, they will keep producing so long as their marginal cost is less than their marginal benefit Increasing Marginal Costs of Production as firms increase production, the cost of each new unit is higher than the cost of the last unit…this is also known as decreasing marginal returns i.e. movements along the supply curve Important! The above assumes an environment of “perfect competition”

Price of DVDs Quantity of DVDs Supplied We call this a “change in supply” or a “shift in the supply curve” Supply has increased at all prices, or the curve has “shifted to the right”

i.e. shifts in the supply curve itself Input Costs – changes in the cost of land, labor or capital, i.e. higher oil prices, increase in minimum wage, etc. Price of Complements Price of Alternative Goods – e.g. if the price of broccoli increases, farmers might shift land away from growing lettuce, so the supply of lettuce decreases Technology – a breakthrough in chip technology might shift the supply curve out; the loss of rights to use of a patent might shift the supply curve in Expectations – could be expectations of future demand, expectations of input price changes, or both Government Intervention – indirect taxes (sales taxes or VAT), producer subsidies, direct regulations, or trade restrictions Number of Suppliers – distinction between individual producer’ supply curve and the supply curve for a region, country, or the globe

Price of DVDs Qty. Demanded (One Year) Qty. Supplied (One Year) $ $ $ $ $ $ Demand & Supply Schedule for DVDs