Supply

Thinking about Supply• To understand supply,

think like a producer, not a consumer.

• Profits generally motivate producers: if profits can be high, they produce more ; if profits must be low, they produce less

• Supply is affected by several factors, most importantly the price of the good.

• Markets require both buyers and sellers; producers are the sellers

Defining Supply

Supply is the amount of a good or service which a seller is willing to provide at a particular price over a particular time period.

• Supply is affected by– Price– Factor costs (“Inputs”) – Supplier Substitutes– Government Actions– Future Expectations– Weather– Technology

Price (P)

• For most goods, when price rises, the quantity supplied rises.

• Producers make higher profits when prices are higher (ceteris paribus…)

• Producers make lower profits when prices are lower

Graphing Supply

• Axes are the same as for demand

• Be sure to label both axes and the curve

• We usually use a straight line for supply, but in reality it can be curved

• Positive relationship between price and quantity

Quantity

Price S

Shifting Supply

• If anything other than price changes, we must shift the curve left or right

• We call this shifting “increasing” or “decreasing” supply

• “Supply” is the whole curve; a specific spot on the curve tells us the “quantity supplied”

Quantity

Price S

Factor Costs (“Inputs”)• Supply changes when

factor costs change• Example: what

happens to supply of lattes when coffee bean prices fall?

• If factor costs increase, supply decreases; if factor costs decrease, supply increases

• Example: what happens to the supply of computers if processor chip prices fall?

Effect of Coffee Bean Prices on Lattes

Quantity

Price S1 S2

Supplier Substitutes• Production substitutes are

what a supplier could produce instead of the product in question

• Example: for a supplier, what is a substitute for ice cream?

• If the price of a substitute increases, supply decreases; if the price of a substitute decreases, supply increases

• Example: the price of building offices rises; what happens to the supply for building houses?

Effect of Office Construction prices on home construction

Quantity

Price S2 S1

Government Action

• Government action (e.g., taxes, subsidies) affects supply

• Example: what happens for supply of photovoltaic cells when government subsidizes their production?

• Example: what happens to supply of air flights when government raises taxes on airport runway departures?

Effect of subsidies on cell production

Quantity

Price S1 S2

Future Expectations• Suppliers want to get the

highest prices for their products

• If suppliers expect higher prices in the future, they REDUCE today’s supply

• If suppliers expect lower prices in the future, they INCREASE today’s supply

• Example: Nokia expects to sell phones at a higher price next month. What happens to today’s supply?

Weather

• Weather can have a strong impact on supply.

• What happens to supply when a freeze strikes CA orange groves?

• What happens when perfect rainfall waters Colorado wheat fields?

Example: iPhones

• What are factor costs for iPhones?

• What are supplier substitutes for iPhones?

• Show the effects of a fall in the cost circuit boards on the supply of iPhones.

• Show the effects of a drop in price of cell phones on app supply

• Show the effects of government subsidies for healthy-lifestyle apps