SUPPLY CURVE
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SUPPLY: Quantities of a good or service a producer is willing and able to produce and supply the market at different possible prices during a particular time period, ceteris paribus
According to the law of supply, there is a Positive Causal Relationship between the price of a good and quantity supplied over a particular period: as price increases, quantity supplied rises; as price decreases, quantity supplied falls
This upward-sloping supply curve is due to Increasing Profit: a rise in price signals the potential for increased profits, thereby incentivizing firms to produce more output
MARKET SUPPLY CURVE
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MARKET SUPPLY: Sum of all individual firms’ supplies for a good
Example: Market for Chocolate
Firm A and Firm B have different supply for Chocolate bars
The Market Supply is derived by adding the quantity supplied by Firm A to the quantity supplied by Firm B, and so on until all quantities supplied by all firms producing chocolate bars are added up
For example, at the price of $3, Firm A supplies 400 bars and Firm B supplies 300 bars; this is added together with all the quantities supplied by other firms to obtain a market supply of 8000 chocolate bars per week at this price level as seen in the Market Supply curve, Sm
SHIFT OF SUPPLY CURVE: NON-PRICE DETERMINANTS OF SUPPLY
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NON-PRICE DETERMINANTS OF SUPPLY: Variables other than price that leads to a change in supply, which is shown by a shift of the entire supply curve
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A Rightward Shift of the supply curve from S1 to S2 indicates that more is supplied at a given price, hence an Increase in Supply
A Leftward Shift of the supply curve from S1 to S3 indicates that less is supplied at a given price, hence a Decrease in Supply
NON-PRICE DETERMINANTS OF SUPPLY:
1) CHANGES IN COST OF PRODUCTION
As firms use various factors of production - land, labour, capital, and entreprenuership - to produce goods and services, this entails a cost on production
LAND: All natural resources including agricultural and non-agricultural land
LABOUR: Physical and mental effort of people to produce goods and services
CAPITAL: Physical (man-made) capital used to produce goods and services such as factories, tools, and machinery
ENTREPRENUERSHIP: Human skill involving the ability to innovate and seek new opportunities to establish and run a business
If there is an increase in price in any factor of production, the firm’s cost of production will increase making production less profitable; hence, the firm will decrease supply, resulting in leftward shift from S1 to S3, vice versa
2) CHANGES IN TECHNOLOGY
Overtime, improvements in technology will increase the productivity of firms, thereby reducing the overall cost of production
If a firm adopts improved technology that increases the productivity of firms, the cost of production will decrease making production more profitable; hence, the firm will increase supply, resulting in a rightward shift of the supply curve from S1 to S2
In an unlikely event that a firm adopts less productive technology, the cost of production will increase making production less profitable; hence the firm will decrease supply, resulting in a leftward shift of the supply curve from S1 to S3
3) CHANGES IN PRICE OF RELATED GOODS
Joint Goods
Two goods - Good X and Good Y - are Joint Goods if they are produced from a single source; thus, it is not possible to produce more of one without producing more of the other (an example of joint goods are butter and skimmed milk which is both produced from whole milk)
If the price of Good X increases, the supply for Good Y will increase, resulting in the supply curve curve for Good Y to shift to the right from S1 to S2; this is because an increase in price of Good X will make production more profitable, incentivizing the increase in output which simultaneously increases the supply of the joint good, Good Y
In other words, when there is a change in price of either good, the supply of joint goods, Good X and Good Y, moves in the same direction
Competitive Goods
Two goods - Good X and Good Y - are Competitive Goods if production is mutually exclusive; thus, only one or the other is produced by the firm (an example of competitive goods are wheat and corn which is competitively produced by a farmer)
If the price of Good X increases, the supply for Good Y will decrease, resulting in the supply curve for Good Y to shift to the left from S1 to S3; this is because an increase in price of Good X will make production more profitable, incentivizing the increase in output at the cost of reducing supply of the competitive good, Good Y
In other words, when there is a change in price of either good, the supply of competitive goods, Good X and Good Y, moves in the opposite direction
4) CHANGES IN PRODUCER EXPECTATION
If a firm expects the price of a good to increase, they may withold and decrease their current supply in the market to sell at a higher price in the future (to maximize profits), resulting in a leftward shift of the supply curve from S1 to S2
If a firm expects the price of a good to decrease, they may increase supply to take advantage of the current higher price (to maximize profits), resulting in a rightward shift of the supply curve from S1 to S3
5) CHANGES IN INDIRECT TAX AND SUBSIDIES
Indirect Tax
An indirect tax is a tax levied on the consumption of goods and services paid for by consumers; however, as they are ultimately collected by producers and passed on to the government, this entails a cost on production for firms
If there is an imposition of a new tax or an increase in an existing tax, the cost of production will increase making production less profitable; hence the firm will decrease supply, resulting in a leftward shift of the supply curve from S1 to S3, vice versa
Subsidies
A Subsidy is a form of financial assistance provided by the government which incentivizes firms to increase the output of a good by lowering their cost of production
If the thre is an introduction of a new subsidy or an increase in an existing subsidy, the cost of production will decrease making production more profitable; hence, the firm will increase supply, resulting in a rightward shift of the supply curve from S1 to S2, vice versa
6) CHANGES IN THE NUMBER OF FIRMS IN MARKET
A change in the number of firms in the market will affect the overall market supply of the good
If there is an increase in number of firms in market, the overall market supply will increase, resulting in a rightward shift of the supply curve from S1 to S2
If there is a decrease in number of firms in market, the overall market supply will decrease, resulting in a leftward shift of the supply curve from S1 to S3
MOVEMENT ALONG SUPPLY CURVE
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MOVEMENT ALONG SUPPLY CURVE: Any change in price produces a change in quantity supplied, which is shown as a movement along the supply curve
SHIFT OF SUPPLY CURVE: Any change in a non-price determinant of supply leads to a change in supply, which is shown by a shift of the entire supply curve
Referring to Figure (a), If the price of a good increases from P1 to P2, the quantity supplied increases from Q1 to Q2, resulting in a movement along the supply curve from A to B
Referring to Figure (b), if there is a change in a non-price determinant of supply which increases supply, the supply curve shifts rightward from S1 to S2; oppositely, a decrease in supply will cause the supply curve to shift leftward from S1 to S3
SUPPLY FUNCTION
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The supply function appears as an equation taking the form:
Qs = c + dP
Where
Qs is the quantity supplied - the dependent variable on the x-axis
P is the price - the independent variable on the y-axis
c is the Q-intercept (horizontal intercept)
d is the slope, given by 𝚫Qs / 𝚫P
As the slope of the supply curve, d, is a positive sign, this equation shows the positive causal relationship between price and quantity supplied as seen in the law of supply
PLOTTING SUPPLY CURVE
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If given a supply function specifying numerical values for c and d, the relationship described by the equation can be expressed in a supply schedule to plot a graph of the curve
Example: Chocolate bars
Suppose the supply function for chocolate bars is
Qs = 2 + 2P
Where
Qs is the quantity of chocolate bars supplied - the dependent variable on the x-axis
P is the price of chocolate bars - the independent variable on the y-axis
2 is the Q-intercept (horizontal intercept)
2 is the slope, given by 𝚫Qs / 𝚫P
With the supply function specifying the numerical values of c and d, the relationship described by the equation can be expressed in a supply schedule to plot a graph of the curve:
Referring to Figure (a), the supply schedule for chocolate bars can be obtained by setting P equal to different values, thereby solving for Qs in each case to obtain different price-quantity combinations
Example: When P = 1, Qs = 2 + 2(1) = 4, When P = 2, Qs = 2 + 2(2) = 6
Referring to Figure (b), the supply schedule can be used to plot the supply curve for chocolate bars with price in the y-axis and quantity in the x-axis
NOTE: Since the supply curve is linear, only two points are needed to draw the supply curve
SHIFT OF SUPPLY CURVE: CHANGES IN PARAMETER ‘d’
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As mentioned previously, any change in a non-price determinant of supply will result in a parallel shift of the supply curve; hence, this change in supply will appear as change in the value of ‘c’ by the same amount:
Decrease in Supply: Qs = (c - decrease in quantity) - dP
Increase in Supply: Qs = (c + increase in quantity) - dP
Example: Chocolate bars
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Case 1: Decrease in Supply
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Suppose the supply function for chocolate bars is
Qs = 2 + 2P.
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However, if there is an imposition of a new tax which leads to a decrease in supply by 4000 bars per week at any given price, What is the new supply function for chocolate bars?
As the imposition of a new tax will increase the cost of production making production less profitable, the firm will decrease supply by 4000 bars per week at any given price
Hence, the supply curve for chocolate bars will shift to the left by 4000 bars per week at any given price
To find this new supply function corresponding to the new supply curve, the new value of paramter ‘c’ needs to be calculated
This can be found by taking the initial value of c = 2 (thousand) and subtracting from that the change in supply of 4 (thousand): New Value of ‘c’ is 2 - 4 = -2
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Therefore, the new supply function is: Qs = -2 + 2P
Case 2: Increase in Supply
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Suppose the supply function for chocolate bars is
Qs = 2 + 2P.
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However, if the number of firms in the market increases, leading to an increase in supply by 4000 bars per week at any given price, What is the new supply function for chocolate bars?
As an increase in number of firms in market will increase the overall supply of chocolate bars, the market supply will increase by 4000 bars per week at any given price
Hence, the supply curve for chocolate bars will shift to the right by 4000 bars per week at any given price
To find this new supply function corresponding to the new supply curve, the new value of paramter ‘c’ needs to be calculated
This can be found by taking the initial value of c = 2 (thousand) and adding the change in supply of 4 (thousand): New Value of ‘c’ is 2 + 4 = 6
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Therefore, the new supply function is: Qs = 6 + 2P
STEEPNESS OF SUPPLY CURVE: CHANGES IN PARAMETER ‘d’
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The parameter ‘d’ is the slope of the supply function defined as the change in quantity supplied over the change in price (𝚫Qs / 𝚫P):
The smaller the absolute value of ‘d’, the steeper the supply curve
The greater the absolute value of ‘d’, the flatter the supply curve
Example: Chocolate bars
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Suppose the supply function for chocolate bars is
Qs = 2 + 2P.
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If the parameter of ‘d’ changes to 4, how will this affect the graph of the new supply curve?
As the absolute value of the new slope is greater than that of the original supply curve (4 > 2), the new supply curve will be flatter than the original supply curve (as shown in the graph above)
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