Boundless EconomicsIntroducing Supply and Demand
Supply
The Law of SupplyThe law of supply states that there is a positive relationship between thequantity that suppliers are willing to sell and the price level.
Learning ObjectivesExplain the Law of Supply
Key TakeawaysKey PointsQuantity supplied moves in the same direction as price.The supply curve is an upward sloping curve.Producers are willing to increase production at higher prices to increase profit.
Key Termssurplus: That which remains when use or need is satisfied, or when a limit isreached; excess; overplus.shortage: a lack or deficiencyequilibrium: The condition of a system in which competing influences arebalanced, resulting in no net change.
The law of supply is a fundamental principle of economic theory. It states thatan increase in price will result in an increase in the quantity supplied, all elseheld constant.
An upward sloping supply curve, which is also the standard depiction of thesupply curve, is the graphical representation of the law of supply. As the price ofa good or service increases, the quantity that suppliers are willing to produceincreases and this relationship is captured as a movement along the supplycurve to a higher price and quantity combination.
The Law of Supply: Supply has a positivecorrelation with price. As the market price of agood increases, suppliers of the good willtypically seek to increase the quantity supplied tothe market.
The rationale for the positive correlation between price and quantity supplied isbased on the potential increase in profitability that occurs with an increase inprice.
All else held constant, including the costs of production inputs, the supplier will
be able to increase his return per unit of a good or service as the price for theitem increases. Therefore, the net return to the supplier increases as the spreador difference between the price and the cost of the good or service being soldincreases.
The law of supply in conjunction with the law of demand forms the basis formarket conditions resulting in a price and quantity relationship at which boththe price to quantity relationship of suppliers and demanders (consumers) areequal. This is also referred to as the equilibrium price and quantity and isdepicted graphically at the point at which the demand and supply curveintersect or cross one another. It is the point where there is no surplus orshortage in the market.
DemandSup
ply
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Q Quantity
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Law of Supply and Law of Demand: Equilibrium: The lawof supply and the law of demand form the foundation forthe establishment of an equilibrium–where the price toquantity combination for both suppliers and demandersare the same.
Supply Schedules and Supply CurvesA supply schedule is a tabular depiction of the relationship between price andquantity supplied, represented graphically as a supply curve.
Learning ObjectivesExplain the price to quantity relationship exhibited in the supply curve
Key TakeawaysKey PointsThe supply curve plots the quantity that is willingly supplied at any given price.The individual supply curves can be summed by quantity provided at a specificprice to achieve an aggregate supply curve.The supply curve is upward sloping in the short run.
Key Termsaggregate: A mass, assemblage, or sum of particulars; something consisting ofelements but considered as a whole.equilibrium: The condition of a system in which competing influences arebalanced, resulting in no net change.
Supply is the amount of some product that producers are willing and able tosell at a given price, all other factors being held constant. In general, supplydepicts a positive relationship between the price of a good or service and thequantity that the producer is willing to supply: if a supplier believes it can sellthe product for more, it will want to make more of the product. As a result, asthe price of a good or service increases, suppliers increase the quantity availablefor purchase.
A supply schedule is a table that shows the relationship between the price of agood and the quantity supplied. The supply curve is a graphical depiction of the
supply schedule that illustrates that relationship between the price of a goodand the quantity supplied.
The Supply Schedule and Supply Curve: Thesupply curve is a graphical depiction of the priceto quantity pairings presented in a supplyschedule. The supply schedule is a table view ofthe relationship between the price suppliers arewilling to sell a specific quantity of a good orservice.
The supply curves of individual suppliers can be summed to determineaggregate supply. One can use the supply schedule to do this: for a given price,find the corresponding quantity supplied for each individual supply scheduleand then sum these quantities to provide a group or aggregate supply. Plottingthe summation of individual quantities per each price will produce an aggregatesupply curve.
In theory, in the long run the aggregate supply curve will not be upward slopingbut will instead be vertical, consistent with a fixed supply level. This is due to theunderlying assumption that in the long run, supply of a good only depends onthe fixed level of capital, technology, and natural resources available.
The supply curve provides one side of the price-to-quantity relationship thatensures a functional market. The other component is demand. When the supplyand demand curves are graphed together they will intersect at a point thatrepresents the market equilibrium – the point where supply equals demand andthe market clears.
Market SupplyMarket supply is the summation of the individual supply curves within a specificmarket where the market is characterized as being perfectly competitive.
Learning ObjectivesIdentify the market conditions that yield a market supply curve.
Key TakeawaysKey PointsA supply curve is the graphical representation of the supplier's positivecorrelation between the price and quantity of a good or service.The supply curve can only be attributed to a depiction of a perfectly competitivemarket due to the unique attributes of perfect competition: firms are pricetakers, no single firm's actions can influence the market price, and ease of exitand entry.The market supply curve is derived by summing the quantity for a given priceacross all market participants (suppliers). It depicts the price-to-quantitycombinations available to consumers of the good or service.
Key Terms
Supply curve: A graphical representation of the quantity producers are willingto make when the product can be sold at a given price.
A supply curve is the graphical representation of the supplier's positivecorrelation between the price and quantity of a good or service. As a result, thesupply curve is upward sloping. Market supply is the summation of theindividual supply curves within a specific market.
Market Supply: The market supply curve is anupward sloping curve depicting the positiverelationship between price and quantity supplied.
The market supply curve is derived by summing the quantity suppliers arewilling to produce when the product can be sold for a given price. As a result, itdepicts the price to quantity combinations available to consumers of the goodor service. In combination with market demand, the market supply curve isrequisite for determining the market equilibrium price and quantity.
By its very nature, conceptualizing a supply curve requires the firm to be aperfect competitor, namely requires the firm to have no influence over themarket price. This is true because each point on the supply curve is the answerto the question "If this firm is faced with this potential price, how much outputwill it be able to and willing to sell? " If a firm has market power, its decision ofhow much output to provide to the market influences the market price, then thefirm is not "faced with" any price, and the question is meaningless.
The attributes of a competitive market signal that the price is set external to anyfirm. Therefore, production in the market is a sliding scale dependent on price.As price increases, quantity increases due to low barriers to entry, and as theprice falls, quantity decreases as some firms may even opt out of the market.
The supply curve can be derived by compiling the price-to-quantity relationshipof a seller. A seller could set the price of a good or service equal to zero andthen incrementally increase the price; at each price he could calculate thehypothetical quantity he would be willing to supply. Following this process theseller would be able to trace out its complete individual supply function. Themarket supply curve is simply the sum of every seller's individual supply curve.
Determinants of SupplySupply levels are determined by price, which increases or decreases supplyalong the price curve, and non-price factors, which shifts the entire curve.
Learning ObjectivesIdentify the factors that affect the supply of a good
Key TakeawaysKey PointsSupply is the quantity of a good or service that a supplier provides to themarket.
Suppliers will shift production for non- price changes related to thedeterminants of supply and will slide production levels across the supply curvefor price related movements.Innumerable factors and circumstances could affect a seller's willingness orability to produce and sell a good.
Key Termsintervention: The action of interfering in some course of events.incentive: Something that motivates, rouses, or encourages.
Supply is the quantity of a good or service that a supplier provides to themarket. Innumerable factors and circumstances could affect a seller's willingnessor ability to produce and sell a good. Some of the more common factors are:
Good's own price: An increase in price will induce an increase in the quantitysupplied.Prices of related goods: For purposes of supply analysis, related goods refer togoods from which inputs are derived to be used in the production of theprimary good.Conditions of production: The most significant factor here is the state oftechnology. If there is a technological advancement related to the production ofthe good, the supply increases.Expectations: Sellers' expectations concerning future market conditions candirectly affect supply.Price of inputs: If the price of inputs increases the supply curve will shift left assellers are less willing or able to sell goods at any given price. Inputs includeland, labor, energy and raw materials.Number of suppliers: As more firms enter the industry the market supply curvewill shift out driving down prices. The market supply curve is the horizontalsummation of the individual supply curves.
Government policies and regulations: Government intervention can takemany forms including environmental and health regulations, hour and wagelaws, taxes, electrical and natural gas rates and zoning and land use regulations.These regulations can affect a good's supply.
Suppliers will change their production levels along the supply curve in responseto a price change, so that their production level is equal to demand. However,some factors unrelated to price can shift the production level. For example, atechnological improvement that reduces the input cost of a product will shiftthe supply curve outward, allowing suppliers to provide a greater supply at thesame price level.
Determinants of Supply: If the price of a goodchanges, there will be movement along the supplycurve. However, the supply curve itself may shiftoutward or inward in response to non-pricerelated factors that affect the supply of a good,
such as technological advances or increased costof materials.Changes in Supply and Shifts in the Supply CurveThe supply curve depicts the supplier's positive relationship between price andquantity.
Learning ObjectivesDistinguish between shifts in the supply curve and movement along the supplycurve
Key TakeawaysKey PointsA change in the price of a good or service, holding all else constant, will result ina movement along the supply curve.A change in the cost of an input will impact the cost of producing a good andwill result in a shift in supply; supply will shift outward if costs decrease and willshift inward if they increase.A change in the expected demand for a good or service will result in a shift insupply; supply will shift outward if enthusiasm is expected to increase and willshift inward if there is an expectation for consumers preferences to change infavor of an alternate good or service.
Key TermsNon-price changes: Shocks, either exogenous or endogenous, that affect thepositioning of the supply curve.
Price changes and movement along supply curveIf the price of the good or service changes, all else held constant such as priceof substitutes, the supplier will adjust the quantity supplied to the level that isconsistent with its willingness to accept the prevailing price. The change in price
will result in a movement along the supply curve, called a change in quantitysupplied, but not a shift in the supply curve. Changes in supply are due to non-price changes.
Non-price changes and shifts of the supply curveIf production costs increase, the supplier will face increasing costs for eachquantity level. Holding all else the same, the supply curve would shift inward (tothe left), reflecting the increased cost of production. The supplier will supply lessat each quantity level.
If production costs declined, the opposite would be true. Lower costs wouldresult in an increase in output, shifting the supply curve outward (to the right)and the supplier will be willing sell a larger quantity at each price level. Thesupply curve will shift in relation to technological improvements andexpectations of market behavior in very much the same way described forproduction costs.
Technological improvements that result in an increase in production for a setamount of inputs would result in an outward shift in supply.
Supply will shift outward in response to indications of heightened consumerenthusiasm or preference and will respond by shifting inward if there is anassessment of a negative impact to production costs or demand.
Supply Shifts: A shift in supply from S1 to S2affects the equilibrium point, and could becaused by shocks such as changes inconsumer preferences or technologicalimprovements.
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