What determines how much is supplied

1
What determines how much is supplied?

• Price
• Input Prices
• Technology
• Expectations

2
What is a supply curve?

• Recall the definition of demand The relationship
  between the price of a product and the quantity
  consumers are willing and able to buy.
• Supply represents the relationship between the
  price of a product and the quantity producers are
  willing to sell.

3
A graphical representation of a supply curve.

• Horizontal axis is quantity
• Vertical axis is price
• Supply curves are downward sloping

Slope Change in P / Change in Q rise/run is
positive
S
(-)
(-)
()
()
Q
0
4
A graphical representation of a supply curve.

• Horizontal axis is quantity
• Vertical axis is price
• Supply curves are downward sloping
• Gives unique price/quantity combinations

S
PA
Q
QA
0
5
Algebraic Representation of Supply

S
b

• PbmQ
• b y-intercept
• Price at which Q0

D
Q
0
6
Algebraic Representation of Supply

S
PA

• PbmQ
• m slope
• mlt0
• m(PA-PB)/(QA-QB)

PB
Q
0
QB
QA
7
Example
/barrel

• Suppose the annual supply of
• crude oil is
• P103Q
• Where P is in per barrel and
• Q is measured in Billions of barrels per year

Qbillion barrels per year
0
8
Example
/barrel

• Suppose the annual supply of
• crude oil is
• P103Q
• To find the y-intercept plug in Q0
• Y-intercept (b)10

10
Qbillion barrels per year
0
9
Example
/barrel

• Suppose the annual supply of
• crude oil is
• P103Q
• The slope is the coefficient on Q as
• long as P is alone on the left side.
• m3
• This means every time the price increases
• by 3, the quantity increases by
• 1 billion barrels

1
2
10
Qbillion barrels per year
0
10
Example
S
/barrel
Suppose the annual demand for crude oil
is P103Q
40
10
Qbillion barrels per year
10
0
11
Supply curves represent the minimum willingness
to sell a given quantity

S
Q
0
12
Why do supply curves slope upward?
13
Why do supply curves slope upward?

• Assume at least one fixed inputshort run
• The cost of producing the next unit of output
  will eventually increase.

14
Supply curves also represent the marginal cost of
producing a given unit

S
MC of producing the 10th unit
Q
10
0
15
Total cost of production is the sum of the
Individual marginal costs of producing each unit
Producer Surplus The difference between
what producers sell the good for and their
costs of production
16
Total Costs

S
A
B
C
D
E
F
G
Q
0
17
Producer Surplus

S
Producer Surplus If the price is PG then PS is
approx. The area below PG and above S
PG
A
B
C
D
E
F
G
Q
0
18
Producer Surplus
Producer Surplus Represents the surplus
revenues available to be spent elsewhere

S
PG
A
B
C
D
E
F
G
Q
0
19
Example
S
/barrel
Suppose the annual demand for crude oil
is P103Q At a price of 40, producer surplus
is ½ (1030)150 billion. Total Revenue is
400 billion (4010). Total Variable Costs are
400-150250
40
10
Qbillion barrels per year
10
0
20
What can cause supply to change?

• Changes in quantity supplied are caused by a
  change in the price of the good

21
Change in quantity supplied

S
20
Price rises
Supply curve doesnt move!
10
Q
0
100
200
Production increases
22
What can cause supply to change?

• Changes in quantity supplied are caused by a
  change in the price of the good
• The only thing that can cause a change in
  quantity supplied is a change in the price of the
  good!
• So what happens if something else changes?

23
What determines how much is supplied?

• Price
• Input Prices
• Technology
• Expectations

Move along the supply curve
24
What determines how much is supplied?

• Price
• Input Prices
• Technology
• Expectations

Move along the supply curve
Shift the supply curve
25
Suppose the cost of steel increases. What
happens to the supply of cars today?

Safter
Sbefore
The supply of cars decreases (shifts to the left)
Q
0
26
Suppose the cost of steel increases. What
happens to the supply of cars today?
Even if the price of cars stays the same,
producers would supply fewer cars.

Safter
Sbefore
25,000
Q
0
Qbefore
Qafter
27
What can cause supply to change?

• The only thing that can cause a change in
  quantity supplied is a change in the price of the
  good!
• If anything else changes, the supply curve must
  shift!

28
Supply shifting possibilities There are only
two!
Supply decrease
P
Safter
Sbefore
Q
0
29
What can cause a supply increase?

• Input prices decrease
• Technology improves
• Expectations expect prices to be lower in the
  future.

30
What can cause a supply decrease?

• Input prices increase
• Technology deteriorates
• Expectations expect prices to be higher in the
  future.