Markets and Supply

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Markets and Supply
Overheads
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Competitive agents
A buyer or seller (agent) is said to
be competitive if the agent assumes or
believes that the market price is given and that
the agent's actions do not influence the market
price.
We call such an agent a price taker.
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Supply for a competitive agent
The total amount of a good that a competitive
agent would choose to produce and sell at a
given price is called the quantity supplied by
that agent.
The market supply of a good is the total amount
that all sellers in a market would choose to
produce and sell at a given price.
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The Supply Function
The supply function for a good is a rule that
specifies the quantity of the good that will be
produced and sold at a given price
holding all other factors that affect the
quantity supplied of the good constant.
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The Supply Function
S quantity supplied
P price of the good
ZS other factors that affect supply
ZS (z1, z2, z3, . . . , zv)
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The Law of Supply
The law of supply states that when the price of a
good rises, and everything else remains the same,
the quantity of the good supplied will rise.
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The Supply Schedule
The supply schedule is a list showing the
quantities of a good that firms will choose to
produce and sell at different prices,
with all other variables held constant
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Supply of Hamburger
Price (per lb) Quantity supplied
0 0
0.3 1000
0.60 2000
0.90 3000
1.20 4000 1.50 5000 1.80 6000 2.10
7000 2.40 8000 2.50 9000 3.00 10000
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The Supply Curve
The supply curve is a graphical depiction of a
supply schedule
a line showing the quantity of a good or service
supplied at various prices,
with all other variables held constant.
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The Law of Supply
The law of supply says that the supply curve has
a positive slope
(slopes upward)
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Other factors in the supply function
Prices of inputs used to produce the good
Prices of alternative goods the firm could produce
The technology used in production
Productive capacity of the industry
Expectations about the future price of the good
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Supply depends on many things
S g (P, input prices, other output prices,
technology, capacity, expectations )
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Changes in Supply
A change in supply is a change in the entire
relationship between price and quantity supplied.

An increase in supply means that sellers would
choose to produce and sell more at any price.
A decrease in supply means that they would
choose to supply less at any price.
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Example change in supply
Prices of cattle rise
Price (per lb) Quantity Supplied
New Quantity Supplied
.30 1000 .60 2000 .90
3000 1.20 4000 1.50 5000 1.80
6000 2.10 7000 2.40 8000 2.70
9000 3.00 10000
600 1200 1800 2400 3000 3600 4200 4800 5400 6000
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Changes in supply are represented by a shift in
the supply curve.
Supply of Hamburger Patties
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Price
5
4
S0
3
2
1
0
0
5000
10000
15000
Quantity
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Changes in supply are represented by a shift in
the supply curve.
When supply increases, the supply curve shifts to
the right
when supply decreases, the supply curve shifts to
the left.
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Changes in supply are represented by a shift in
the supply curve.
Supply of Hamburger Patties
6
Price
5
4
3
2
1
0
0
5000
10000
15000
Quantity
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Changes in supply as compared to changes in the
quantity supplied
Along a fixed supply curve, as price changes the
quantity supplied will change.
This is called a change in the quantity supplied
in contrast to a change in supply that shifts the
whole curve.
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Changes in supply and changes in the quantity
supplied
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Price
5
S0
4
3
2
1
0
0
5000
10000
15000
Quantity
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Factors causing changes in supply
Prices of inputs used to produce the good
Prices of alternative goods the firm could produce
The technology used in production
Productive capacity of the industry
Expectations about the future price of the good
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Effect of input prices on supply
A rise in the price of an input causes a decrease
in supply, shifting the supply curve to the left.
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Effect of other output prices on supply
An alternative good is another good that the
firm could produce using some of the same type of
inputs as the good in question.
A rise in the price of an alternative product
will decrease the supply of the good, shifting
the supply curve to the left.
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Effect of productive capacity on supply
An increase in the number of firms in an industry
will increase supply, shifting the supply curve
to the right.
An increase in the size of each firm in an
industry will increase supply, shifting the
supply curve to the right.
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Effect of technology on supply
Technological advance will increase the supply of
the good, shifting the supply curve to the right.
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Expectations and Supply
If firms anticipate the price of a product will
rise in the near future, they may choose to sell
less of the product now, thus decreasing the
supply.
If firms anticipate the price of a product will
fall in the near future, they may choose to
supply more of the product now.
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The End
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The End