Chapter 4

Supply

Demand is all about the buyer.

Supply is all about the seller.

Supply vs. Demand

The various amounts of something a producer is willing and able to sell at different possible prices at a particular time.

Definition of Supply

Like demand, there is a price effect for supply.

At higher prices, suppliers are willing to supply more goods and services than at lower prices.

Supply and the Price Effect

Increase in Price = Increase in Quantity Supplied

Why does OPEC (Organization of Petroleum Exporting Countries) strictly set and constantly change production rates for oil in the Middle East?

Question for Thought

The sum of all individual supplies in a given market at a particular time.

Market Supply

Why would producer A supply 40 quarts of milk at 10 cents, and producer C supply 0 quarts of milk at that price?

Producer C won’t offer any quarts of milk at 5 or 10 cents because its marginal cost of production is higher than those prices

◦It costs more than 10 cents for producer C to make one quart of milk

Marginal Cost of Production

For example, suppose it costs $1000 to produce 100 units and $1020 to produce 101 units.  The average cost per unit is $10, but the marginal cost of the 101st unit is $20

Marginal Cost of Production

If the change in price has a large impact on the amount of goods and services that are supplied, then the price effect is big and the supply is elastic.

Price Elasticity of Supply

CHICKEN!!◦The number of chickens provided by chicken producers can increase greatly when the price of chickens goes up Because Marginal Cost of raising more

chickens is not very high

Elastic Supply Example

If a change in price has little impact on the quantity of a good or service supplied, then the price effect is small and supply is inelastic.

Inelastic of Supply

Gasoline Custom Made Furniture Expensive Cars (Ferrari, Porsche…)

All of these products have a high marginal cost of production

Inelastic supply example

The price effect concerns changes in quantity supplied (movements along the supply curve)

True change in supply involves a shift to right (increase) or left (decrease)

The Price Effect vs. Change in Supply

The price of gasoline has increased by 50 cents this past week because of unrest in the Middle East and particularly Libya◦Was there a change in supply in this instance?

Example

Remember! When price is changing, it is the price effect and NOT a change in demand

The amount that was able to leave the Middle East and Libya decreased (not the amount actually in existence)

NO—dealing simply with price effect

So What Causes a Change (SHIFT of curve) in Supply

Companies and employees find more efficient ways to produce their goods and decrease production costs.

Sellers can then supply more at every possible price.

Changes in the Marginal Cost of Production

When new businesses enter the market the supply will increase, causing the supply curve to shift to the right.

Changes in the Number of Sellers or Producers

If producers expect higher future prices for their product they may produce more today.

Change in Expectations