1. 1 Market Mechanism Supply Module 3

2. 2 supply  Understand the difference between supply quantity supplied. and quantity supplied. ObjectivesObjectives

3. 3  Understand the difference between supply and quantity supplied.  Define the “Law of Supply” and explain why the supply curve is usually upward sloping. ObjectivesObjectives

4. 4  Understand the difference between supply and quantity supplied.  Define the “Law of Supply” and explain why the supply curve is usually upward sloping.  Understand the difference between a change in supply and a change in quantity supplied. ObjectivesObjectives

5. 5  Understand the difference between supply and quantity supplied.  Define the “Law of Supply” and explain why the supply curve is usually upward sloping.  Understand the difference between a change in supply and a change in quantity supplied.  Understand what causes the supply curve to shift. ObjectivesObjectives

6. 6 6 Understand the difference between supply and quantity supplied. Objective 1

7. 7 7 supply curve  A supply curve shows the quantities supplied by a producer at various prices. Understand the difference between supply and quantity supplied. Objective 1

8. 8 supply curve  A supply curve shows the quantities supplied by a producer at various prices. Objective 1: … the difference between supply and quantity supplied. Price per cup ($) Quantity Supplied (cups of coffee) $0.500 1.001 1.502 2.003 2.504 3.005 3.506 4.007 4.508 5.009 Chris’ Supply ScheduleChris’ Supply Curve The supply curve shows the relationship between the price of a product and the quantity supplied of that product.

9. 9 Quantity supplied  Quantity supplied is the quantity of a product that particular a firm is willing and able to supply at a particular price. Quantity supplied  Quantity supplied refers to a point on the supply curve. Objective 1: … supply and quantity supplied….

10. 10 Quantity supplied  Quantity supplied is the quantity of a product that particular a firm is willing and able to supply at a particular price. Quantity supplied  Quantity supplied refers to a point on the supply curve. If the price of coffee is $1, Chris is willing to supply 1 cup (point “g”). If the price of coffee is $3, Chris is willing to supply 5 cups (point “l”). If the price rises to $4.50, Chris is willing to supply 8 cups of coffee (point “t”). Objective 1: … supply and quantity supplied Quantity supplied: point on the curve

11. 11 Objective 1: … supply and quantity supplied  Supply versus Quantity Supplied:  Supply versus Quantity Supplied: Supply refers to the entire curve while quantity supplied is associated with a point on the curve.

12. 12 Define the “Law of Supply” and explain why the supply curve is upward sloping Objective 2

13. 13 Law of Supply  The Law of Supply states that holding everything else constant, an increase in the price of a product causes an increase in the quantity supplied and a decrease in the price of a product causes a decrease in the quantity supplied. Define the “Law of Supply” and explain why the supply curve is upward sloping Objective 2

14. 14 Objective 2: … explain why the supply curve is upward sloping positive  Why is there a positive relationship between price and quantity supplied?

15. 15 Objective 2: … explain why the supply curve is usually upward sloping Two factors explain the Law of Supply: Profit motive: 1. Profit motive: A higher market price, holding all else constant induces suppliers to increase quantity supplied because profit margins increase.

16. 16  Two factors explain the Law of Supply: Profit motive: 1. Profit motive: A higher market price, holding all else constant induces suppliers to increase quantity supplied because profit margins increase. The law of Increasing Opportunity Cost: 2. The law of Increasing Opportunity Cost: As more and more is produced, resources must be drawn away from alternative uses, bidding up the opportunity cost. Thus, producers require higher prices to supply more of a product. Objective 2: … explain why the supply curve is usually upward sloping

17. 17 Understand the difference between a change in quantity supplied and a change in supply Objective Objective 3

18. 18 change in quantity supplied  A change in quantity supplied refers to a movement along a supply curve in response to a change in the price of the product. Understand the difference between a change in quantity supplied and a change in supply Objective Objective 3

19. change in quantity supplied  A change in quantity supplied refers to a movement along a supply curve in response to a change in the price of the product. Objective 3: … a change in quantity supplied and a change in supply. 19 Quantity supplied changes when price changes. This is shown as a movement along a curve.

20. 20 Objective 3: … a change in quantity supplied and a change in supply

21. 21 change in supply  A change in supply is shown as a shift of the entire supply curve. In other words, at every price, quantity supplied has now changed. Objective 3: … a change in quantity supplied and a change in supply

22. 22 change in supply  A change in supply is shown as a shift of the entire supply curve. In other words, at every price, quantity supplied has now changed. change in supply not  A change in supply is not caused by a change in price. Objective 3: … a change in quantity supplied and a change in supply

23. 23 change in supply  A change in supply is shown as a shift of the entire supply curve. In other words, at every price, quantity supplied has now changed. change in supply not  A change in supply is not caused by a change in price. change in supply  A change in supply is caused by a change in factors other than the price of the good in question. Objective 3: … a change in quantity supplied and a change in supply.

24. 24 decrease in supplyleftward shift  A decrease in supply is represented by a leftward shift of the supply curve. Objective 3: … a change in supply

25. 25 Initially, at a price of $3.00, Chris was willing to supply 5 cups of coffee but now at the same price he is willing to supply 3 cups of coffee (from “l” to “v”). decrease in supply  A decrease in supply is represented by a leftward shift leftward shift of the supply curve. Objective 3: … a change in supply

26. 26 increase in supplyrightward shift  An increase in supply is represented by a rightward shift of the supply curve. Objective 3: … a change in supply

27. 27 increase in supplyrightward shift  An increase in supply is represented by a rightward shift of the supply curve. Objective 3 … a change in supply Initially, at a price of $1.00, Chris was willing to supply 1 cup of coffee but now at the same price he is willing to supply 3 cups of coffee (from “g” to “r”).

28. 28 Objective 4 Understand what causes the supply curve to shift ceteris paribus  Recall the ceteris paribus requirement: Along a supply curve, only price and quantity supplied change; all other factors that affect the supply decision are held constant.  What are these other factors (other than price) that affect the supply decision?

29. 29 Objective 4 Understand what causes the supply curve to shift 1. Price of the good Determinants of Supply include:

30. 30 Objective 4 Understand what causes the supply curve to shift 1. Price of the good 2. Prices of inputs such as wages Determinants of Supply include:

31. 31 Objective 4 Understand what causes the supply curve to shift 1. Price of the good 2. Prices of inputs such as wages 3. Technological change Determinants of Supply include:

32. 32 Objective 4 Understand what causes the supply curve to shift 1. Price of the good 2. Prices of inputs such as wages 3. Technological change 4. Prices of substitutes in production (rival goods) Determinants of Supply include:

33. 33 Objective 4 Understand what causes the supply curve to shift 1. Price of the good 2. Prices of inputs such as wages 3. Technological change 4. Prices of substitutes in production (rival goods) 5. Price of complements in production (jointly produced goods) Determinants of Supply include:

34. 34 Objective 4 Understand what causes the supply curve to shift 1. Price of the good 2. Prices of inputs such as wages 3. Technological change 4. Prices of substitutes in production (rival goods) 5. Price of complements in production (jointly produced goods) 6. Number of firms in the market Determinants of Supply include:

35. 35 Objective 4 Understand what causes the supply curve to shift 1. Price of the good 2. Prices of inputs such as wages 3. Technological change 4. Prices of substitutes in production (rival goods) 5. Price of complements in production (jointly produced goods) 6. Number of firms in the market 7. Expectations of suppliers about future prices Determinants of Supply include:

36. 36 Objective 4 Understand what causes the supply curve to shift 1. Price of the good 2. Prices of inputs such as wages 3. Technological change 4. Prices of substitutes in production (rival goods) 5. Price of complements in production (jointly produced goods) 6. Number of firms in the market 7. Expectations of suppliers about future prices 8. Government policies that affect production Determinants of Supply include:

37. 37  A change in the price of the good causes a movement along the supply curve. Objective 4: … what causes the supply curve to shift

38. change in any determinant other than the priceshift  A change in any determinant other than the price of the good in question causes a shift of the supply curve. Objective 4: … what causes the supply curve to shift 38  A change in the price of the good causes a movement along the supply curve.

39. 39 The United Auto Workers (UAW) has successfully negotiated higher wages. What happens in the auto industry? Objective 4: … what causes supply to shift Example 1: Supply shifter – Wages

40. 40 The United Auto Workers (UAW) has successfully negotiated higher wages. What happens in the auto industry? wages Do not confuse wages (supply determinant) income with income (demand determinant). Objective 4: … what causes supply to shift Example 1: Supply shifter – Wages

41. 41 The United Auto Workers (UAW) has successfully negotiated higher wages. What happens in the auto industry? wages Do not confuse wages (supply determinant) income with income (demand determinant). An increase in wages increase the cost of production. The supply curve shifts left. Objective 4: … what causes supply to shift Example 1: Supply shifter – Wages

42. 42 Suppose suppliers of silver expect the price of fall next month silver to fall next month. How does this affect the today supply of silver today?  Today, supply increases in anticipation of lower prices in the future. Example 2: Supply shifter – change in producers’ expectations expectations Objective 4: … what causes supply to shift

43. 43 Suppose suppliers of silver expect the price of silver to fall next month. How does this affect the supply of silver today?  Today, supply increases in anticipation of lower prices in the future. S 1 : Today’s supply curve with a new set of expectations about price S 0 : Today’s demand curve with some given set of expectations about price The Supply of Silver Example 2: Supply shifter – change in producers’ expectations Objective 4: … what causes supply to shift Today’s price

44. Land is used to grow soybean and corn. What happens to the supply of corn following a decrease in the price of soybean? Example 3: Supply shifter - change in the price of a rival (in production) good Objective 4: … what causes supply to shift 44

45. Land is used to grow soybean and corn. What happens to the supply of corn following a decrease in the price of soybean? substitutes in production or rivalgoods  Soybean and corn are substitutes in production or rival goods. Example 3: Supply shifter - change in the price of a rival (in production) good Objective 4: … what causes supply to shift 45

46. Land is used to grow soybean and corn. What happens to the supply of corn following a decrease in the price of soybean? substitutes in production or  Soybean and corn are substitutes in production or rivalgoods rival goods. common input  When two goods are rivals in production, they must share at least one common input. In this example, land is the common input and soybean and corn are rivals in production. Example 3: Supply shifter - change in the price of a rival (in production) good Objective 4: … what causes supply to shift 46

47. 47 A decrease in the price of soybean will decrease the quantity supplied of soybean. This is shown by a movement along the supply curve for soybean. Objective 4: … what causes supply to shift Example 3: Supply shifter - change in the price of a rival (in production) good

48. 48 A decrease in the price of soybean will decrease the quantity supplied of soybean. This is shown by a movement along the supply curve for soybean. Farmers now allocate more land toward producing corn. The supply curve for corn shifts right. decreaseincrease rivals in production.  A decrease in the price of soybean leads to an increase in the supply of corn, given that soybean and corn are rivals in production. Objective 4: … what causes supply to shift Example 3: Supply shifter - change in the price of a rival (in production) good

49. 49 decrease in the price of good S increase in the supply of good C  Two goods S and C are rivals (or substitutes) in production if a decrease in the price of good S leads to an increase in the supply of good C or, if an increase in the price of good S leads to an decrease in the supply of good C. Definition of Rivals in Production Objective 4: … what causes supply to shift

50. 50 decrease in the price of good S increase in the supply of good C  Two goods S and C are rivals (or substitutes) in production if a decrease in the price of good S leads to an increase in the supply of good C or if an increase in the price of good S leads to an decrease in the supply of good C. negative  A negative relationship exists between the price of good S and the supply of good C. Definition of Rivals in Production Objective 4: … what causes supply to shift

51. 51 decrease in the price of good S increase in the supply of good C  Two goods S and C are rivals (or substitutes) in production if a decrease in the price of good S leads to an increase in the supply of good C or if an increase in the price of good S leads to an decrease in the supply of good C. negative  A negative relationship exists between the price of good S and the supply of good C. Do Not Confuse substitutes in consumption with rivals in production (also called “substitutes in production”). Definition of Rivals in Production Objective 4: … what causes supply to shift

52. Market Mechanism Supply End of Module 3 Song:Money for Nothing Album:Brothers in Arms Artists:Dire Straits