Supply Supply AS 1.3AS 1.3

3 credits3 credits

QuizQuiz

Define Market SupplyDefine Market Supply State the calculation for Market State the calculation for Market

SupplySupply Describe an indirect taxDescribe an indirect tax Describe a subsidyDescribe a subsidy Define ProductivityDefine Productivity

AnswersAnswers

Total of all individual supply at each and Total of all individual supply at each and every priceevery price

Horizontal addition of individual quantity Horizontal addition of individual quantity supply at each and every pricesupply at each and every price

A tax paid by a third party to the govt. A tax paid by a third party to the govt. Usually on the sale of goods and servicesUsually on the sale of goods and services

A payment to producers from the government A payment to producers from the government to increase the production of good considered to increase the production of good considered to be a merit to society (good for society)to be a merit to society (good for society)

An increase in output per unit of inputAn increase in output per unit of input

SupplySupply SupplySupply = the = the

quantity of a good or quantity of a good or service a producer is service a producer is willing and able to willing and able to buy at each and buy at each and every priceevery price

Supply ScheduleSupply Schedule = = a table showing a table showing combinations of combinations of price and quantity price and quantity SuppliedSupplied

Supply Schedule for pies Supplied in a week

Price ($) Quantity Supplied (no. of pies)

0.25 1

0.50 3

1.00 5

2.00 10

Supply Curve = a graph plotting combinations of price and quantity Supplied

D

Title

Label & Units on axes

Even Scale

Plot Points joined

Curve labelled

Change in Quantity Change in Quantity SuppliedSupplied

Change in quantity Supplied = when Change in quantity Supplied = when price price changeschanges there is a there is a movement along the movement along the Supply curveSupply curve from one quantity to another. from one quantity to another.

D

When Price decreases, quantity Supplied When Price decreases, quantity Supplied decreases decreases

(or When Price increases, quantity (or When Price increases, quantity Supplied increases )Supplied increases )

Law of SupplyLaw of Supply

Change in SupplyChange in Supply A Supply curve is drawn assuming “ceteris A Supply curve is drawn assuming “ceteris

paribus”. paribus”.

Ceteris Paribus = “all determinants affecting Ceteris Paribus = “all determinants affecting Supply are held constant except price.”Supply are held constant except price.”

If any determinant apart from price changes, we If any determinant apart from price changes, we must shift (move) the Supply curve. This is called must shift (move) the Supply curve. This is called a a change in Supplychange in Supply..

Increase in Supply Decrease in Supply

Increase = shift right Decrease = shift left

Demand and Supply curves have the same rule:

Increase = shift right

Decrease = shift left

Determinants of SupplyDeterminants of Supply

So what are the factors that will cause the entire So what are the factors that will cause the entire Supply curve to shift?Supply curve to shift?

• Costs of ProductionCosts of Production• Changes in ProductivityChanges in Productivity• TechnologyTechnology• Price of other goodsPrice of other goods• Environmental factorsEnvironmental factors• Legal factorsLegal factors• Trade factorsTrade factors• Cultural influencesCultural influences• Political factorsPolitical factors

Costs of ProductionCosts of Production– Eg. Wages, raw materials, electricity, Eg. Wages, raw materials, electricity,

petrol, petrol, – If costs of production increase, supply If costs of production increase, supply

decreases.decreases.

Increased Productivity (increases Increased Productivity (increases supply)supply)– The amount of output per unit of inputThe amount of output per unit of input– Eg. Productivity increases from 10 boxes per Eg. Productivity increases from 10 boxes per

hour to 13 boxes per hour.hour to 13 boxes per hour.– Productivity can result from labour (workers) Productivity can result from labour (workers)

working more effectively or from new capital working more effectively or from new capital (machines and equipment)(machines and equipment)

TechnolgyTechnolgy– Eg. Firm invests in new computer Eg. Firm invests in new computer

system.system.– New technology increases supply New technology increases supply

because it increases a firms because it increases a firms productivity.productivity.

Changes in Other (related) Changes in Other (related) GoodsGoods– If the price of a related good If the price of a related good

changes it can affect the firms changes it can affect the firms willingness to supply.willingness to supply.

– Eg. Price of beef falls. Farmers may Eg. Price of beef falls. Farmers may switch from supplying beef to switch from supplying beef to supplying more lamb.supplying more lamb.

Environmental factorsEnvironmental factors– Being more “environmentally Being more “environmentally

friendly” increases costs of friendly” increases costs of productionproduction

Legal FactorsLegal Factors– Changes to laws can affect firms Changes to laws can affect firms

ability to supply. Costs of ability to supply. Costs of production increase as firms have production increase as firms have to comply (follow) new laws.to comply (follow) new laws. The Health and Safety ActThe Health and Safety Act Labelling and packaging requirementsLabelling and packaging requirements Zoning laws – where you can buildZoning laws – where you can build Noise lawsNoise laws Anti Pollution lawsAnti Pollution laws

Trade FactorsTrade Factors– Firms are affected by:Firms are affected by:– Tariffs = tax on imported goodsTariffs = tax on imported goods– Subsidy = payment to local Subsidy = payment to local

producersproducers– Quota = limit on quantity allowedQuota = limit on quantity allowed

Cultural FactorsCultural Factors– Being “Culturally Sensitive” can Being “Culturally Sensitive” can

increase costs of productionincrease costs of production Eg. Paying for iwi consultationEg. Paying for iwi consultation Eg. Avoiding building on sacred groundEg. Avoiding building on sacred ground

Political FactorsPolitical Factors– Taxes on “demerit goods” – alcohol Taxes on “demerit goods” – alcohol

& cigarettes& cigarettes– Subsidies for “merit gods” eg. Subsidies for “merit gods” eg.

Cycle helmetsCycle helmets– Company taxCompany tax– Overall economic policy – eg. Overall economic policy – eg.

Interest ratesInterest rates

Market SupplyMarket Supply

A market is made up of more A market is made up of more than one producerthan one producer

Market Supply = the sum of Market Supply = the sum of individual supply at each and individual supply at each and every priceevery price

It is calculated by horizontally It is calculated by horizontally adding individual supply curves at adding individual supply curves at each and every price.each and every price.

PricePrice

$ per $ per boxbox

Sarah’sSarah’s

Quantity Quantity SuppliedSupplied

Sam’sSam’s

Quantity Quantity SuppliedSupplied

Sarnia’sSarnia’s

Quantity Quantity SuppliedSupplied

Market Market Quantity Quantity SuppliedSupplied

55 33 22 11

88 66 44 33

1212 99 55 55

Impacts of Supply Impacts of Supply DecisionsDecisions For excellence you need to be able to For excellence you need to be able to

analyse the impact of supply decisions analyse the impact of supply decisions (keep your producer hat firmly on!!)(keep your producer hat firmly on!!)

Eg. Govt decides to allow Easter Eg. Govt decides to allow Easter trading:trading:– Increased sales = more profitsIncreased sales = more profits

But maybe it just means less sales after Easter?But maybe it just means less sales after Easter?

– Increased staffing requiredIncreased staffing required– May have to pay overtime ratesMay have to pay overtime rates– Increased cost of advertisingIncreased cost of advertising– Increased costs for electricity etc.Increased costs for electricity etc.

Impacts of Supply Impacts of Supply DecisionsDecisions Eg. Pam sells heaters and govt. has Eg. Pam sells heaters and govt. has

just increased safety standards just increased safety standards required:required:– May have to re-train staffMay have to re-train staff– May choose to switch to producing a May choose to switch to producing a

related goodrelated good May result in increased costs and maybe May result in increased costs and maybe

increased profitsincreased profits

– May have to change production methodsMay have to change production methods Costs of production increaseCosts of production increase May introduce technologyMay introduce technology

– Costs increase but may increase productivityCosts increase but may increase productivity

Impacts of Supply Impacts of Supply DecisionsDecisions

Eg. Krystle’s clerical service: Govt Eg. Krystle’s clerical service: Govt subsidises firms who recycle paper:subsidises firms who recycle paper:

Eg. Hey Mi’s Record Store: Govt Eg. Hey Mi’s Record Store: Govt reduces the tariff on imported DVD’s reduces the tariff on imported DVD’s but keeps the tariff on imported CD’sbut keeps the tariff on imported CD’s

Eg. Moniques hat shop: Monique Eg. Moniques hat shop: Monique decides to import expensive hats from decides to import expensive hats from MilanMilan

For each example, analyse the effects on supply. Use economic terms like profit, costs, revenue, related goods etc. and …. Keep your producer hat on!!

Impacts of Supply Impacts of Supply DecisionsDecisions

Eg. Hey Mi’s Record Store: Govt Eg. Hey Mi’s Record Store: Govt reduces the tariff on imported DVD’s reduces the tariff on imported DVD’s but keeps the tariff on imported CD’sbut keeps the tariff on imported CD’sConsider the impact on:Consider the impact on:– GovernmentGovernment– ConsumersConsumers– DVD player shops eg. Noel LeemingsDVD player shops eg. Noel Leemings– Jessica’s Records who only sell CD’sJessica’s Records who only sell CD’s– Movie theatresMovie theatres

As well as Producers, other groups are affected by supply decisions: