2. Supplyslide 1 MODEL OF SUPPLY 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.

3. Supplyslide 2 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 expectations taxes and subsidies

4. Supplyslide 3 YOU COULD WRITE THE MODEL THIS WAY: The supply of lemon-lime: Q S (lemon-lime) = S(P lemon-lime, P citric acid, P carbon dioxide, P labor,...,technology, expectations, taxes & subsidies)

5. Supplyslide 4 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.

6. Supplyslide 5 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.

7. Supplyslide 6 A SUPPLY CURVE A supply curve must look like this, i.e., be positively sloped. own price quantity supplied supply Market for lemon-lime

8. Supplyslide 7 The supply curve means: You pick a price, such a p 0, and the supply curve shows how much is supplied. own price quantity supplied supply p0p0 Q0Q0 Market for lemon-lime

9. Supplyslide 8 own price quantity supplied supply p0p0 Q0Q0 Market for lemon-lime If the price of lemon-lime rises, how is the supply curve affected? Go to hidden slide

10. Supplyslide 9 At a higher price, firms want to sell more. own price quantity supplied supply p0p0 Q0Q0 p higher Q1Q1 Market for lemon-lime

11. Supplyslide 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.

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

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

14. Supplyslide 13 Changes in input prices Consider the supply of lemon-lime, and suppose the price of citric acid, a crucial input to lemon-lime, falls. Lemon-lime firms now find that lemon-lime production is more profitable than it was before, and they respond to this be increasing the supply of lemon-lime.

15. Supplyslide 14 The price of citric acid falls from $300 per ton to $100 per ton. own price quantity supply @ citric acid price of $300/ton Market for lemon-lime How will this affect the supply curve for lemon-lime? How will this affect the supply curve for lemon-lime? Go to hidden slide

16. Supplyslide 15 This is a change in supply. Lemon-lime firms want to sell more lemon-lime at each price of lemon-lime. own price quantity supply @ citric acid price of $300/ton supply @ citric acid price of $100/ton Market for lemon-lime

17. Supplyslide 16 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.

18. Supplyslide 17 own price quantity supply with old technology Market for lemon-lime Suppose lemon-lime technology improves. How does this affect the supply curve for lemon-lime? How does this affect the supply curve for lemon-lime? Go to hidden slide

19. Supplyslide 18 own price quantity supply with old technology supply with improved technology Market for lemon-lime There is an increase in supply. The supply curve shifts to the right

20. Supplyslide 19 price Q S (no tax) How would you suspect an excise tax affects the supply of a good? Go to hidden slide

21. Supplyslide 20 price Q S (no tax) S (with excise tax) This distance is the amount of the excise tax per unit of the good. How would you suspect an excise tax affects the supply of a good?

22. Supplyslide 21 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, expectations, or taxes show up as shifts in the supply curve.