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.

Supply(From the desk of Ms Imrana slide 1

Bano)
 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(From the desk of Ms Imrana slide 2

Bano)
 YOU COULD WRITE THE MODEL
THIS WAY:
The supply function for pizza

QS(pizza) = S(Ppizza, P pizza sauce, Plettuce, Plabor,

Ptomatoes, . . . ,technology, taxes &
subsidies)

Supply(From the desk of Ms Imrana slide 3

Bano)
 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(From the desk of Ms Imrana slide 4

Bano)
 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(From the desk of Ms Imrana slide 5

Bano)
 A SUPPLY CURVE
A supply curve must look like this, i.e., be positively
sloped.

own supply
price

quantity supplied
pizza MARKET
Supply(From the desk of Ms Imrana slide 6
Bano)
 The supply curve means:
You pick a price, such a p0, and the supply curve shows
how much is supplied.
own
supply
price

p0

quantity supplied
Q0
pizza MARKET
Supply(From the desk of Ms Imrana slide 7
Bano)
 If the price of pizza rises, how is
the supply curve affected?
own supply
price

p0

quantity supplied
Q0
pizza MARKET

Supply(From the desk of Ms Imrana Go to hidden slide slide 8

Bano)
At a higher price, firms want to sell
more.

own
supply
price

phigher

p0

quantity supplied
Q0 Q1
pizza MARKET
Supply(From the desk of Ms Imrana slide 9
Bano)
 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(From the desk of Ms Imrana slide 10

Bano)
 ECONOMISTS HAVE
HYPOTHESES ABOUT HOW
CHANGES IN EACH OF THE
INDEPENDENT VARIABLES
AFFECTS THE AMOUNT
SUPPLIED

Supply(From the desk of Ms Imrana slide 11

Bano)
 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(From the desk of Ms Imrana slide 12

Bano)
 Changes in input prices

Consider the supply of pepsi, and suppose the price

of hops, a crucial input to pepsi, falls. pepsi firms
now find that pepsi production is more profitable
than it was before, and they respond to this be
increasing the supply of pepsi.

Supply(From the desk of Ms Imrana slide 13

Bano)
 The price of hops falls from
$300 per ton to $100 per ton.

own price supply @ hops price

of $300/ton

How will this affect the

supply curve for pepsi?

quantity
pepsi MARKET
Supply(From the desk of Ms Imrana Go to hidden slide slide 14
Bano)
 This is a change in supply. pepsi firms
want to sell more pepsi at each price of
pepsi.

own price supply @ hops price

of $300/ton

supply @ hops
price of $100/ton

quantity
pepsi MARKET
Supply(From the desk of Ms Imrana slide 15
Bano)
 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(From the desk of Ms Imrana slide 16

Bano)
 Suppose pepsi technology improves.

own price supply @ old

technology
How does this affect
the supply curve for pepsi?

quantity
pepsi MARKET
Supply(From the desk of Ms Imrana Go to hidden slide slide 17
Bano)
 There is an increase in supply. The supply
curve shifts to the right

own price supply @ old

technology

supply @
improved
technology

quantity
pepsi MARKET
Supply(From the desk of Ms Imrana slide 18
Bano)
How would you suspect an excise tax affects
the supply of a good?

price

S (no tax)

Q
Supply(From the desk of Ms Imrana Go to hidden slide slide 19
Bano)
How would you suspect an excise tax
affects the supply of a good?

price
S (with excise tax)

S (no tax)

This distance is the amount

of the excise tax per unit of
the good.
Q
Supply(From the desk of Ms Imrana slide 20
Bano)
 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(From the desk of Ms Imrana slide 21

Bano)