Session 1

(SL&HL)

10.04.2022
Irina Kovaleva
 Goals
By the end of this chapter, you should be able to:

➔ Define supply
➔ Explain the Law of Supply
➔ Illustrate а supply curve
➔ Explain the non-price determinants of supply
➔ Distinguish between а shift and а movement along а supply curve
➔ Understand the relationship between an individual producer's supply
and market supply
HL explain the assumptions underlying the Law of Supply –
diminishing marginal returns and increasing marginal costs.
 Supply
• Supply is defined as the quantity of а good or service that producers
are willing and able to supply at different prices in а given time
period.
• For example, firms may be willing and able to produce 4,000 frozen
pizzas per week, at а price of $3 each. We would say that their supply
of frozen pizzas at а price of $3 would be 4,000 units each week.
• The important phrase here is "willingness and ability", as it was in
demand.
• It is not enough for producers to be willing to produce а good or
service; they must also be able to produce it, ie they must have the
financial means to supply the product, the ability to supply.
• This is known as effective supply and it is this that is shown on а
supply curve.
How does the Law of Supply work?
• The Law of Supply simply states that “as the price of а
product rises, the quantity supplied of the product will
usually increase, ceteris paribus”.
• It is sometimes expressed even more simply as “the supply
curve normally slopes upwards".
• In the neoclassical model, it is assumed that producers are
rational "maximizers". That is, their only goal is to maximize
profits. So since rising prices can translate into higher profits
for producers, they will wish to increase supply to take
advantage of the higher potential profits.
 How does the Law of Supply work?
• The Law of Supply may be illustrated
using either а supply schedule or а
supply curve.
• The supply schedule and supply curve
show the sum of all individual
producers' supply, and is known as
the market supply.
• This is а curve that shows the
relationship between the price of а
product, which is placed on the
vertical axis, and the quantity
supplied of the same product over
time, which is placed on the horizontal
 How does the Law of Supply work?
• Economists often draw supply as straight line.
• As we have seen, in the Law of Supply а change in the price of the product
itself will lead to а change in the quantity supplied of the product, i.e. а
movement along the existing supply curve.
• The phrase “change in the quantity
supplied" is important, since it differentiates
а change in price from the effect of а change
in any of the other determinants of supply.
• In Figure, а change in the price of frozen
pizzas, from $2.50 to $3.00, leads to an
increase in the quantity of frozen pizzas
supplied, from 3,500 pizzas per week to
4,000 pizzas per week.
 What are the non-price determinants of
supply?
There are а number of factors that determine supply and lead to an
actual shift of the supply curve to either the right or the left.
The determinants of supply are outlined below:
1. The cost of factors of production
2. The price of related goods - competitive and joint supply
3. Government intervention - indirect taxes and subsidies
4. Expectations about future prices
5. Changes in technology
6. Weather or natural disasters
(67) Non price determinants of supply - YouTub
e
 1. The cost of factors of production
• If there is an increase in the cost of a factor of
production, such as a wage increase in a firm
producing textiles, which is labor-intensive,
then this will increase the firm's costs.
• This means that they can supply less, shifting
the supply curve to the left.
• A rise in the level of wages in the textile firm
means that the firm must now supply fewer
textiles at all prices and the supply curve will
shift to the left from S to S1.
• A fall in the cost of factors of production will
enable firms to increase their supply, shifting
the supply curve to the right.
 2. The price of related goods - competitive and
joint supply
• Competitive supply - often, producers have а choice as to what they are
going to produce, because the factors of production that they control are
capable of producing more than one product.
• For example, а producer of roller skates may also be able to produce
skateboards with а minimal change in production facilities.
• In this case, if the price of skateboards rises, because there is more demand
for them, then it may well be that the producer will be attracted by the
higher prices and aim to supply more skateboards and fewer roller skates.
• This would lead to а movement along the supply curve of skateboards and
а shift to the left of the supply curve of roller skates.
 2. The price of related goods -
competitive and joint supply
• As you can see, а rise in the price of skateboards from р to р1
leads to an increase in the quantity of skateboards supplied
from q to q1.
• This change in the price of skateboards means that some
producers will now supply fewer roller skates, since they are
manufacturing skateboards.
• There will be а fall in the supply of roller skates, at all prices,
and the supply curve will shift to the left from S to S1.
• Even though the price of roller skates has not changed, there
is а fall in the supply from q to q1.
• In this case, skateboards and roller skates are "competing" for
the factors of production that the firm has in their control.
• Thus, it is often said that products are in competitive supply.
 2. The price of related goods - competitive and
joint supply
• Joint supply - sometimes, when one good
is produced, another good is produced at
the same time.
• You might hear the term "by-product“
where products that are in joint supply are
concerned.
• For example, when sugar is refined,
molasses (патока) is created. Molasses is
said to be а by-product of sugar and the
two products are in joint supply.
• When crude oil is treated to produce
petrol, other goods are inevitably
produced as well, such as diesel.
2. The price of related goods - competitive
and joint supply
• An increase in the demand for petrol shifts
the demand curve for petrol from D to D1 .
• The quantity supplied of petrol will increase
from q to q1, in response to the increase in
price from р to р1.
• Because diesel is in joint supply, there will be
an automatic increase in the supply of diesel
and the supply curve will shift to the right
from S to S1, lowering the price of diesel to р1
and increasing the quantity demanded and
supplied to q1.
 3. Government intervention - indirect taxes and
subsidies
• In many countries, governments intervene in markets in ways that alter the
supply. The two most common ways are through indirect taxes and subsidies.
• Indirect taxes - are taxes on goods and services that are added to the price of
а product. The producers are the ones that have to pay the taxes to the
government, so the taxes effectively increase the costs of production to the
firms.
• Therefore, they have the effect of shifting the supply curve upwards by the
amount of the indirect tax. Less of the product will be supplied at every price.
• Subsidies - are payments made by the government to firms that will, in
effect, reduce their costs of production. This then has the effect of shifting
the supply curve downwards by the amount of the subsidy. More of the
product will be supplied at every price.
 4. Expectations about future prices
• Producers make decisions about what to supply based on their
expectations of future prices.
• Producers who expect the demand for their product to rise in the
future may assume that the higher demand will lead to а higher
price. If it is possible to store the product they might then withhold
the product from the market in order to be ready to be able to
supply more in the future, to gain from the higher price.
• Similarly, if market research suggests that demand for а product will
fall in the future, then producers will be likely to reduce their supply
of the product.
 5. Changes in technology
• Improvements in the state of technology in а
firm or an industry should lead to an increase in
supply and thus а shift of the supply curve to
the right.
• In the unlikely event of а backward step in the
state of technology, the supply curve would
shift to the left.
• Although this is unlikely, natural disasters, such
as hurricanes or earthquakes, may have the
effect of moving technology backwards in an
area or country.
 6. Weather or natural disasters
• In markets vulnerable to weather
conditions, such as agricultural markets,
the weather can have an impact on
supply.
Beer supply threatene
• Extremely favorable weather could lead
to "bumper crops" with increased supply
d by future weather ex
while poor weather, such as drought, can
lead to significant cuts in supply.
tremes (phys.org)
• Scientists are predicting significant
challenges in the production of
agricultural output as a result of climate
change.
What is the distinction between а movement along
а supply curve and а shift of the supply curve?

• А change in the price of the good

itself leads to а movement along the
existing supply curve, since the price
of the good is on one of the axes.
• A change in any of the other
determinants of supply will always
lead to a shift of the supply curve to
either the left or the right.
(67) Change in Demand vs. Change in Quanti
ty Demanded - YouTube
 What is the relationship between an individual
producer's supply and market supply?
• It is possible to construct the supply curve for а whole market by the process of
horizontal summing that we came across in the theory of demand.
• Table shows the supply of three different producers of а product.
• By adding up the individual supplies at each price, it is possible to calculate the
total market supply.
 What is the relationship between an individual
producer's supply and market supply?
• As with demand, this is the process of horizontal summing, because it is the
values on the horizontal axis for the individual supply curves that are added
together to get the market supply curve.
• The figures on the vertical axis are common to all of the supply curves and
so do not change.
 Exercise 1
Explain how the supply of petrol (gasoline) may be affected now if petrol
station owners expect to be able to sell at higher prices next week.
 Exercise 2
Explain how the supply of coal may be affected if the coal miners’ labour
union succeeds in forcing employers to provide full health insurance and
life insurance to all workers.
 Exercise 5.2
Using fully labelled diagrams, illustrate what may be the outcome in each of the
questions:
1. What would happen to supply of bicycles if there were large increase in the tax on
bicycles?
2. What would happen to supply of foreign holidays if there were fall in price of holidays?
З. What would happen to the supply of vinyl records if there were а significant increase in
the price of the components used to make vinyl records?
4. What would happen to the supply of cars if the government were to subsidize car
production in order to encourage employment in the car industry?
5. What would happen to the supply of white bread if а firm were to discover that there
has been а large increase in the demand for brown bread, which they could also produce?
6. What would happen to the supply of а certain brand of bottled water if there were an
improvement in the technology used to produce it?
7. What would happen to the supply of carrots if the farmer decided to preserve the
environment by farming in а more traditional manner, instead of making more profits?