Introduction to Supply

Introduction

• In our mission to understand how prices are determined, we have focused so far only on the consumer.

• We now need to turn our attention to the producers of goods and services.

• It is important to be aware that demand and supply operate independently of one another.

Definition

• Supply:– The offering of an economic product for sale.

• Not all suppliers are businesses – anyone who offers an economic product for sale is a supplier.– When you look for a job, you are offering labor as

an economic product for sale.

Supply and Price• The supply for a product depends on its price.

– It does NOT depend on demand (at least not directly).• A change in price causes a new quantity to be supplied.

– This is called a CHANGE IN QUANTITY SUPPLIED.– It is NOT a change in supply (to be explained later).

• Therefore the term supply refers to how much is supplied at each and every possible price (by an individual supplier or an entire industry).

• There are two ways of showing this relation:– The supply schedule– The supply curve

• Both show the exact same information.

The Supply SchedulePrice per T-Shirt # T-Shirts Supplied

$30 350

$27 330

$24 300

$21 240

$18 190

$15 140

$12 70

$9 20

$6 0

The Supply Schedule, cont.

• A CHANGE IN QUANTITY SUPPLIED is shown by moving from one pair of numbers (price and quantity) in the schedule to another.– For example, when the price rises from $18 to

$24, there is an INCREASE IN QUANTITY SUPPLIED from 190 to 300.

The Supply Curve

0

5

1 0

1 5

2 0

2 5

3 0

3 5

0 5 0 1 0 0 1 5 0 2 0 0 2 5 0 3 0 0 3 5 0 4 0 0

Q u a n t i t y o f T - S h i r t s S u p p l i e d

Pri

ce p

er T

-Sh

irt

The Supply Schedule, cont.

• A CHANGE IN QUANTITY SUPPLIED is shown by moving along the curve to the right or left from one point to another. – For example, when the price decreases from $24

to $18, there is a DECREASE IN QUANTITY SUPPLIED from 300 to 190 shown by the leftward movement along the curve.

Increase in Quantity SuppliedD1 S

Quantity

PriceA

B

D2

Rightward movement long the supply curve

Decrease in Quantity SuppliedD2 S

Quantity

PriceB

A

D1

Leftward movement along the supply curve

The Law of Supply

• The quantity supplied for an economic product varies directly with its price.– Therefore, the higher the price, the higher the quantity

supplied.– The lower the price, the lower the quantity supplied.

• This is evident from both the supply schedule and the supply curve.

• Note that supply is basically the opposite of demand in this respect.

0

5

1 0

1 5

2 0

2 5

3 0

3 5

0 5 0 1 0 0 1 5 0 2 0 0 2 5 0 3 0 0 3 5 0 4 0 0

Q u a n t i t y o f T - S h i r t s S u p p l i e d

Pri

ce p

er T

-Sh

irt

0

5

1 0

1 5

2 0

2 5

3 0

0 5 0 1 0 0 1 5 0 2 0 0 2 5 0 3 0 0 3 5 0

Q u a n t i t y o f C D s D e m a n d e d

Pri

ce p

er C

D

Supply CurveDemand Curve

Why is there a direct relation between price and quantity supplied?

1. The opportunity cost of producing more

2. More complex reasons which we will save for college economics

1. The Opportunity Cost of Increasing Production

• At a low price, it is not worth it for the supplier to produce more.– The opportunity cost of doing so is too high, since

there are other uses for those resources. – Ex: You might spend a couple of hours mowing

lawns for $3 an hour. Would you want to mow lawns all day long for that little? You probably have better uses of your time.

1. Opportunity Cost, cont.

• As the price increases, the supplier isn’t giving up as much by deciding to produce more.– The opportunity cost is now decreasing, since it is

relatively better to use the resources toward this product.

– Ex: You would probably be more willing to mow lawns all day for $10 an hour than $3.

• Therefore, higher prices lead to a higher quantity supplied, and vice-versa. (Direct relation)