1. Prepared by Dr.Hassan Sweillam
SUPPLY THEORY
Prepared by Dr.Hassan Sweillam
Supply

2. MODEL OF SUPPLY SUPPLY DEFINED
The model of supply is an attempt to explain the amount supplied of any good or service.
SUPPLY DEFINED
The amount of a good or service a firm wants to sell, and is able to sell per unit time.
Supply

3. THE “STANDARD” MODEL OF SUPPLY
The DEPENDENT variable is the amount supplied.
The INDEPENDENT variables are:
the good’s own price
the prices of inputs used in its production
the technology of production
taxes and subsidies
Supply

4. YOU COULD WRITE THE MODEL THIS WAY:
The supply function for tacos
QS(tacos) = S(Ptacos, Ptaco shells, Plettuce, Plabor,
Ptomatoes, ,technology, taxes &
subsidies)
Supply

5. THE SUPPLY CURVE
The supply curve for any good shows the quantity supplied at each price, holding constant all other determinants of supply.
The DEPENDENT variable is the quantity supplied.
The INDEPENDENT variable is the good’s own price.
Supply

6. THE LAW OF SUPPLY
The Law of Supply says that an increase in a good’s own price will result in an increase in the amount supplied, holding constant all the other determinants of supply.
The Law of Supply says that supply curves are positively sloped.
Supply

7. A SUPPLY CURVE
A supply curve must look like this, i.e., be positively sloped.
own price
supply
quantity supplied
TACO MARKET
Supply

8. The supply curve means:
You pick a price, such a p0, and the supply curve shows how much is supplied.
own price
supply p0 Q0
quantity supplied
TACO MARKET
Supply

9. If the price of tacos rises, how is the supply curve affected?
own price
supply p0
quantity supplied Q0
TACO MARKET
Supply
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10. AN IMPORTANT POINT
When drawing a supply curve notice that the axes are reversed from the usual convention of putting the dependent (y) variable on the vertical axis, and the independent (x) variable on the horizontal axis.
Supply

11. ECONOMISTS HAVE HYPOTHESES ABOUT HOW CHANGES IN EACH OF THE INDEPENDENT VARIABLES AFFECTS THE AMOUNT SUPPLIED
Supply

12. Other factors affecting supply
The question here is how to show the effects of changes in input prices, technology, and taxes.
The answer, of course, is that changes in input prices, technology, or taxes cause the supply curve to shift.
Supply

13. Changes in input prices
Consider the supply of a special edition CD of your favorite band is released for $20. Because the record company's previous analysis showed that consumers will not demand CDs at a price higher than $20, only ten CDs were released. If, however, the ten CDs are demanded by 20 people, the price will subsequently rise because, according to the demand relationship, as demand increases, so does the price. Consequently, the rise in price should prompt more CDs to be supplied as the supply relationship shows that the higher the price, the higher the quantity supplied.
If, however, there are 30 CDs produced and demand is still at 20, the price will not be pushed up because the supply more than accommodates demand.
Supply

14. The price of olive falls from $300 per ton to $100 per ton.
own price
olive price of $300/ton
How will this affect the
supply curve for olive oil?
quantity
Olive oil MARKET
Supply
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15. Change in technology
An improvement in technology makes it possible to produce a level of output with fewer inputs than before.
Because this lowers the cost of production, profits rise, and firms will try to supply more.
Supply

16. Suppose Olive oil technology improves.
own price
old technology
How does this affect
the supply curve for olive oil?
quantity
Olive oil MARKET
Supply
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17. How would you suspect an excise tax affects the supply of a good?
price
S (no tax) Q
Supply
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18. Supply summary
Supply is a function of own price, input prices, and technology.
The supply curve shows supply as a function of own price, all else constant.
Changes in a good’s own price show up as movements along a supply curve.
Changes in input prices, technology, or taxes show up as shifts in the supply curve.
Supply

19. Review questions True or False Questions
1- Supply is the amount of a good or service a firm wants to sell, and is able to sell per unit time.
Answer: True
2- In the supply model the dependent variable is the amount supplied.

20. Review questions True or False Questions
3- The Law of Supply says that an increase in a good’s own price will result in an increase in the amount supplied, holding constant all the other determinants of supply.
Answer: True
4- The Law of Supply says that supply curves are negatively sloped.
Answer: False

21. Review questions Multiple Choice Questions
1- _______________says that an increase in a good’s own price will result in an increase in the amount supplied, holding constant all the other determinants of supply.
A- Law of Supply
B- Law of demand
C- Supply
D- Supply independent variable
Answer: A

22. Review questions
2- The Law of Supply says that supply curves are ________sloped.
A- Neutral
B- Negatively
C- Positively
D- None of these
Answer: C

23. Review questions
3- changes in __________________cause the supply curve to shift.
A- input prices
B- technology
C- taxes
D- All of these
Answer: D

24. Review questions Brief explain Questions
1- Briefly explain the Law of Supply illustrated with graphics?
2- Briefly explain the dependent and independent variable in the supply model ?
Brief explain Questions