SupplySupply

What is Supply?What is Supply?

• Supply is how much a firm is willing to sell at every given price, ceteris paribus

• Thus, if all else remains the same and the price of a good goes up, what would you expect the response of a firm to be?– To produce more, since prices are going up, so

will profits

Law of SupplyLaw of Supply

• Law of Supply - the price of a product (or service) is directly related to the quantity supplied, ceteris paribus.

• While demand typically refers to consumers, supply typically refers to firms.

Supply Schedules and CurvesSupply Schedules and Curves

• Supply Schedule/Curve - a table or diagram showing the relationship between the price of a good and the quantity supplied, ceteris paribus.

Supply ScheduleSupply Schedule

P ($) Qs per month

$20 15

$15 7

$10 5

Supply CurveSupply Curve

Qs per month

5

10

15

20

0 5 10 15

A

B

C

P($) S

Theory of Market EntryTheory of Market Entry

• When the price/supply of a product rises, that product stands out as a good opportunity to make money.

• Examples– Food: Subway Franchises– Media: Type of Music, TV Shows, Movies

Change in SupplyChange in Supply

Factors That Cause a Change in Supply

• Input Costs

Input CostsInput Costs

• Any change in the cost of an input to produce a good will affect supply– Raw materials, machinery, labor

Change in SupplyChange in Supply

Factors That Cause a Change in Supply

• Input Costs

• Technology

TechnologyTechnology

• Improvement in technology lowers costs• Lower cost of production increases Supply

• Worsening of technology increases costs• Higher cost of production decreases Supply

Change in SupplyChange in Supply

Factors That Cause a Change in Supply

• Input Costs

• Technology

• Expectations of Future Price

Expectations of Future PricesExpectations of Future Prices

• Firms expect price of their goods to increase or decrease in the future.

• Increase in price• Supply increases today

• Firm would prefer to sell today when price is higher

• Decrease in price• Supply decreases today

• Firm would prefer to wait until the good can be sold for a higher price

Change in SupplyChange in Supply

Factors That Cause a Change in Supply

• Input Costs

• Technology

• Expectations of Future Price

• Number of Suppliers

Number of SuppliersNumber of Suppliers

• The number of sellers in the market determines the amount of quantity supplied at every price

Change in SupplyChange in Supply

Factors That Cause a Change in Supply

• Input Costs

• Technology

• Expectations of Future Price

• Number of Suppliers

• Government Influence

Government Influence on SupplyGovernment Influence on Supply

• Subsidies: Government payment that supports a business or market.

• Taxes: Government reduces supply of a product by putting a excise tax on it.

• Regulation: Government intervention in a market that affects price, quantity or quality of a good