Supply

Learning Objectives:

• What is Supply?

• What determines the slope of the supply curve?

• What forces are behind the shifts in the supply curve?

• What is a supply function?

Definition of Market Supply

• Individual firm level supply for a good is the quantity supplied of that good by an individual producer at different prices, all other things being unchanged.

• Market supply for a good is the sum total of all the individual firm level supply for that particular good.

• Supply curve traces the quantities of a good being supplied by all the producers in an economy at different prices, all other things being unchanged.

Change in Quantity Supplied vs. Change in Supply

• Change in quantity supplied of a good is a movement along the supply curve following a change in the price of that good.

• Change in supply for a good is a shift of the supply curve following a change in any factor influencing the supply other than price of that good.

• Example: Want L.L. Bean Duck Boots Right Now? Head To eBay, Pay Double

Factors Shifting the Supply Curve

• Input Prices

• Technology

• Producers’ expectations

• Number of firms

• Climate change/ natural calamity

• Government regulation and taxes

• Substitutes in production

Change in Input Price

• Supply for a good falls if the price of an input rises.

Change in Technology

• Supply of a good rises if there is a technological breakthrough in the production process of the good.

Change in Producers’ Expectations

• A change in producers’ expectations in the favor of a good will lead to a rise in the supply of that good.

Change in the Number of Firms

• If there is a rise in the number of firms producing a good, then the supply of the good will rise.

Change in Climate/ Natural Calamity

• With unfavorable changes in climate, supply of a good will fall.

• If production capacity is negatively affected due to natural calamities, supply of a good will fall.

• Example: Almond Drought Boosting India Sweets to Australian Farms

Change in Government Regulation and Taxes

• If there are unfavorable changes in government regulations, then the supply of good will fall.

• If there is a rise in taxes imposed by the government, then the supply of a good will fall.

• Example: Judge Orders California Sriracha Factory to Halt Odor-Making Operations

Change in the Demand for Substitutes in Production

• If there is a rise in the demand for goods that can also be produced using the productive capacities for a particular good, then the supply of that good will fall.

• Example: Former Tobacco Fields Now Grow Chickpeas To Serve America's Growing Hummus Addiction

Supply Function

• The supply function for a good gives us the different quantities of the good that will be supplied at different price levels of that good, and different levels of all other factors affecting the supply for that particular good.

• Linear supply function: