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Chapter 4 SUPPLY ANALYSIS 2 nd Sem , S.Y 2013-2014. Supply Analysis. The analysis of the supply of produced goods has two parts: An analysis of the supply of the factors of production to households and firms. - PowerPoint PPT Presentation
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BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Chapter 4 SUPPLY ANALYSIS2nd Sem, S.Y 2013-2014
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
The analysis of the supply of produced goods has two parts:
– An analysis of the supply of the factors of production to households and firms.
– An analysis of why firms transform those factors of production into usable goods and services.
Supply Analysis
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Supply
Supply is the willingness and ability of producers to offer or sell good and services for sale.
Supply for a product is the amount of the good or service that producers in a market are willing and able to sell at a certain price, ceteris paribus (others variables held constant).
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
The Law of Supply
Law of supply – direct relationship between price and quantity supplied.
It states that producers are willing to sell more of a good or service at a higher price than they are at a lower price
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Law of Supply – As the price of a product rises, producers will
be willing to supply more. – The height of the supply curve at any quantity
shows the minimum price necessary to induce producers to supply that next unit to market.
– The height of the supply curve at any quantity also shows the opportunity cost of producing the next unit of the good.
The Law of Supply
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Economic Models in Supply Analysis
Supply Schedule Supply Curve Supply Function
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Supply Schedule
Supply schedule a table that shows the relationship between the price
of a good and the quantity supplied. This reflects the various quantities of the product that
will be sold at various prices at a specific time and place. It can be an individual or a market supply schedule.
Market supply schedule is the sum of all the individual supply for a particular good
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Individual Supply vs. Market Supply
Market supply refers to the sum of all individual supply for a particular good or service.
Graphically, individual supply curves are summed horizontally to obtain the market demand curve.
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Price per kilo
ABCDE
A. Individual Supply Schedule for Tomatoes in Pangasinan
Tomatoes supplied
per month
50 40302010
500400300200100
A Sample Supply Schedule
Price per kilo
ABCDE
B. Market Supply Schedule for Tomatoes in Pangasinan
Tomatoes supplied
per month
50 40302010
10,0008,0006,0004,0002,000
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Supply Curve
The supply curve is the graphical representation of the law of supply.
The supply curve slopes upward. The slope tells us that the quantity
supplied varies directly – in the same direction – with the price.
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Pric
e (p
er u
nit)
0Quantity supplied (per unit of time)
PA
QA
A
A Sample Supply Curve
Supply Curve
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Price
per
kilo
(In
peso
s)
B. Supply Curve
Quantity of Tomatoes supplied (per month)100 200 300 400 500
60
50
40
30
20
10
0
A
B
C
D
From a Supply Schedule to a Supply Curve
Supply of Tomatoes
Price per kilo
ABCDE
A. Supply Schedule for Tomatoes in Pangasinan
Tomatoes supplied per week
50 40302010
500400300200100
E
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Let’s Check Your Understanding
Suppose that you want to analyze the market supply of cabbage in Baguio City. You survey all the farms that produce and sell cabbage and determine how many kilos they are willing to sell at various prices. If your survey enables you to make a market supply schedule, create a hypothetical supply schedule for cabbage. Use this market supply schedule to draw a market supply curve and derive a supply equation.
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Supply Function shows the relationship between the quantity supplied and the price of the good (and other factors). In simple terms, quantity supplied is a function of price…[Qd = f (P…) ].
The supply function is given by the equation
In the given supply schedule, the
supply equation can be derived using the two-point form in finding the equation of a line. The formula is
Supply Function
Price per kilo
ABCDE
A. Supply Schedule for Tomatoes in Pangasinan
Tomatoes supplied per week
50 40302010
500400300200100
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Let’s Check Your Understanding!
Price (P)
Quantity Supplied
250 20500 50750 70
1,000 801,250 901,500 100
From the following table of prices of branded jeans and quantity supplied (in thousands of jeans), draw the supply curve for branded jeans. Describe the curve.
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Let’s Check Your Understanding!
The supply curve for a product is represented by the equation,, where is quantity supplied and is price. 1. What is the quantity supplied if the price is Php 500? 2. What is the price if the quantity supplied is 400 units?3. What is the highest price to be paid for this commodity?4. What quantity would be supplied if the product is free?5. What is the inverse equation of the supply curve? Graph the
supply curve
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Supply refers to a schedule of quantities a seller is willing to sell per unit of time at various prices, other things constant.
Quantity suppliedrefers to a specific amount that will be supplied at a specific price.
Supply versus Quantity Supplied
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Change in quantity supplied caused by a change in the price of a good. the movement of points within the same supply
curve.
Change in supply the changes in the quantity supplied brought about
by any of the non-price determinants of supply (input cost, technology, taxes and subsidies, etc.) and not by price (which is constant).
Change in Quantity Supplied vs. Change in Supply
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
A movement along a supply curve is the graphical representation of the effect of a change in price on the quantity supplied.
Movements Along a Supply Curve vs.Shifts in Supply
A shift in supply is the graphical representation of the effect of anything (factors affecting supply) other than price on supply.
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Change in Quantity Supplied
S1
Change in quantity supplied(a movement along the curve)
B
0
Pric
e (p
er u
nit)
Quantity supplied 100
50
25
200
A
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
S1
D1
Shift in SupplyP
rice
(per
uni
t)
Quantity Supplied100
50
30
250
S2
S0
Increasein Supply
Decreasein Supply
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Let’s Check Your Understanding!
Determine whether the following will have effect on the change in the quantity supplied or change in supply. Show the effect through a graph.
1. The price of notebook computers sharply falls so many manufacturers produce less.
2. New technologies have made it possible to build large cruise ships, Econ cruise lines offer more cabins, at lower prices, than before.
3. Econ Phone develops an effective wireless technology thus, it increases the supply of cell phones
4. An increase in the number of Internet service providers increases the supply of such services.
5. Coco lumber firms expect that there will be a substantial rise in future prices of coco lumbers, thus the firms decrease their supply of coco lumbers today.
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Determinants of Supply
Taxes and Subsidies
Input Costs
Number of Producers
Producer Expectations
Technology and Labor Productivity
Weather
Prices of Substitutes and Complements
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Non-price Determinants of Supply
Supply Shifters are factors that cause shifts in the supply curve:
– Input Costs or Resource Prices– The prices of related good– Technology and Labor Productivity– Number of Sellers– Future Price Expectation– Taxes and Subsidies– Weather
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Input Costs
Input costs are the price of the resources needed to produce a good or service
When costs go up, profits go down, so that the incentive to supply also goes down.
Supply will increase when the cost of inputs falls, and vice versa.
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Increase in Supply
Decrease in Supply
Input Costs – Shift in the Supply Curve
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Prices of Related Goods
Substitutes – are often pairs of goods that are used in place of each other in production process.
Complements - are pairs of goods that are used together in production of a good or service.
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Increase in Supply
Decrease in Supply
PRR (Substitutes) – Shift in the Supply Curve
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Increase in Demand
Decrease in Demand
PRR (Complements) – Shift in the Supply Curve
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Technology
Involves the application of scientific methods and discoveries to the production process, resulting in new products or new manufacturing techniques.
Improvements in technology enable producers to spend less on inputs yet still produce the same output. When a better technology becomes available, reducing the cost of production, supply increases, and the supply curve shifts to the right.
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Labor Productivity
It is the amount of goods and services that a person can produce in a given time.
Increasing productivity decreases the costs of production and therefore increases supply.
Better-trained and more-skilled workers can usually produce more goods in less time, and therefore at lower costs, than less-educated or less-skilled workers
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Increase in Demand
Decrease in Demand
Technology– Shift in the Supply Curve
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Producer Expectation
If producers expect the price of their product to rise or fall in the future, it may affect how much of that product they are willing and able to supply in the present.
For example, if a farmer expects the price of corn to be higher in the future, he may store some of the current crop, thereby decreasing supply.
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Increase in Supply
Decrease in Supply
Producer Expectation – Shift in the SC
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Number of Producers
An increase in the number of producers means increased competition, which may eventually drive less-efficient producers out of the market, decreasing supply.
When one company develops a successful new idea, whether it’s the latest generation of cell phones, or fast-food meal, other producers soon enter the market and increase the supply of the good or service. When this happens, the supply curve shifts to the right.
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Increase in Supply
Decrease in Supply
Number of Sellers – Shift in the Supply Curve
BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis
Pangasinan State UniversitySocial Science Department – PSU Lingayen
Taxes and Subsidies
An excise tax is a tax on the production or sale of a specific good or service. Excise taxes are often placed on items such as alcohol and tobacco— things whose consumption the government is interested in discouraging.
Taxes like excise tax increase producers’ costs and, therefore, decrease the supply of goods.
Taxes tend to decrease supply; subsidies have the opposite effect. A subsidy is a government payment that partially covers the cost of an economic activity. The subsidy’s purpose is to encourage or protect that activity.