MODEL OF SUPPLY

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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.
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THE STANDARD MODEL OF SUPPLY
The DEPENDENT variable is the amount
supplied. The INDEPENDENT variables are the
goods own price the prices of inputs used in its
production the technology of production taxes and
subsidies
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YOU COULD WRITE THE MODEL THIS WAY
the supply of tacos QS(tacos) S(Ptacos, Ptaco
shells, Plettuce, Plabor, Ptomatoes, . . .
,technology, taxes subsidies)
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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 goods own price.
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THE LAW OF SUPPLY
The Law of Supply says that an increase in a
goods 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.
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A SUPPLY CURVE
A supply curve must look like this, i.e., be
positively sloped.
supply
own price
quantity supplied
TACO MARKET
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The supply curve means
You pick a price, such a p0, and the supply curve
shows how much is supplied.
own price
supply
quantity supplied
TACO MARKET
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If the price of tacos rises, how is the supply
curve affected?
own price
supply
p0
quantity supplied
Q0
TACO MARKET
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At a higher price, firms want to sell more.
own price
supply
p0
quantity supplied
Q0
TACO MARKET
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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.
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ECONOMISTS HAVE HYPOTHESES ABOUT HOW CHANGES IN
EACH OF THE INDEPENDENT VARIABLES AFFECTS THE
AMOUNT SUPPLIED
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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.
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Changes in input prices

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

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The price of hops falls from 300 per ton to 100
per ton.
own price
supply _at_ hops price of 300/ton
How will this affect the supply curve for beer?
quantity
BEER MARKET
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This is a change in supply. Beer firms want to
sell more beer at each price of beer.
own price
supply _at_ hops price of 300/ton
quantity
BEER MARKET
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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.

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Suppose beer technology improves.
own price
supply _at_ old technology
How does this affect the supply curve for beer?
quantity
BEER MARKET
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There is an increase in supply. The supply
curve shifts to the right
own price
supply _at_ old technology
quantity
BEER MARKET
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• How would you suspect an excise tax affects the
  supply of a good?

price
S (no tax)
Q
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• How would you suspect an excise tax affects the
  supply of a good?

price
S (no tax)
Q
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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 goods 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.