CHAPTER

Supply

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 Supply

Supply refers to a schedule of quantities of a good a seller is

willing to sell per unit of time at various prices, other things
constant.

Price Quantity Supplied

0 0
1 1
2 2
3 3

2
 Supply
The law of supply states that the quantity of a good
supplied is directly related to the good’s price.
In other words, other things equal:
• Quantity supplied rises as price rises.
• Quantity supplied falls as price falls.
The law of supply occurs because:
• When prices rise, firms substitute production of one
good for another.
• Assuming a firm’s costs are constant, a higher price
means higher profit.
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 The Supply Curve
A supply curve is the graphic representation of the
relationship between price and quantity supplied.

Supply
Price and quantity
supplied vary directly.
P1
The supply curve is
P0 upward sloping.

As price increases,
quantity supplied
Q increases.
Q0 Q1
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 Quantity Supplied
Quantity supplied refers to a specific amount that will
be supplied per unit of time at a specific price, other
things constant.
It refers to a specific point on the supply curve.
A change in price changes quantity supplied.
A change in price causes a change in quantity supplied.
A change in price causes a movement along the supply
curve.

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 Shifts in Supply versus
Movements Along a Supply Curve

Supply refers to the entire supply curve.

Supply tells us how much will be sold at various prices.
A change in anything other than price that affects the
supply curve changes the entire supply curve.
A change in the entire supply curve is a shift in supply.

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 Movement Along a Supply Curve

A change in price causes a movement along the supply curve.

Supply

C
$80

B
$50

Q
4.1 4.3
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 Shift in Supply
A change in a shift factor causes a shift in supply.

P
S0

S1

Q
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 Factors in Supply Shift
Important shift factors of supply include:

1. Price of inputs

2. Technology

3. Prices of related goods

4. Expectations

5. Taxes and subsidies

6. Particular factors
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1. Price of inputs:
Profit = TR - TC
Total revenue = P of output x Q output
TC = total cost = Q inputs x P of inputs
Increase in p of inputs shifts the S curve to the left or up.
Increase in cost of production shifts S to the left.

2.Technology: output = f(inputs)

Brings about a change in cost of production.
Tech improvement reduces cost of production and
therefore, shifts the S curve down or to the right. 10
3. Prices of related goods
Complements in production/Substitutes in production
Eg. Car producer = sports cars, family cars = substitutes
in production
P of sports cars increases. P of family cars remains the
same.
P S P S1

P0----------------------- S0

Q Q
Sports cars Family car
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Complements in production

e.g. cattle = meat plus leather

P of meat is increasing, p of leather constant.

Ceteris paribus, what happens to S of meat and
leather as a result of increase in the price of meat.
S
P1------------------- S0
po-------------- P0 ----------------------- S1

Meat q1 leather q0 q1
Increase in meat prices increases the quantity
supplied
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4. Expectations
Positive expectations about prices, profits, sales = shifts in
Supply to the right

5. Taxes and Subsidies

Taxes increase cost of production = S shifts to the left
Subsidies = negative tax = reduces cost of production = S
shifts to the right

6. Particular factors – weather, pandemic etc.

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 Market Supply: Price per Movie

Price
+ Barry’s + Charlie’s = Market
supply supply supply
(per movie) Ann’s Supply

$1.00 1 0 0 1

$3.00 3 2 0 5

$5.00 5 4 0 9

$7.00 7 5 2 14

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 Market Supply Curve: Movies per Week

The market supply curve is the horizontal summation of all

individual supply curves.

P
CHARLIE BARRY ANN

$7.00

$5.00

$3.00 Market supply for

movies
$1.00
Q
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

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 Six Things to Remember about a
Supply Curve

1. A supply curve follows the law of supply. When price

rises, quantity supplied increases, and vice versa.
2. The horizontal axis—quantity—has a time dimension.
3. The quality of each unit is the same.
4. The vertical axis—price—assumes all other prices
remain constant.
5. The supply curve assumes everything else is constant.
6. Effects of price changes are shown by movements along
the supply curve. Effects of nonprice determinants of
supply are shown by shifts of the entire supply curve.
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