MODEL OF SUPPLY

1. MODEL OF SUPPLY The model of supply is an attempt to explain the amount supplied of any good or service. SUPPLY DEFINED The amount of a good or service a firm wants to sell, and is able to sell per unit time. Supply

2. THE “STANDARD” MODEL OF SUPPLY • The DEPENDENT variable is the amount supplied. • The INDEPENDENT variables are: • the good’s own price • the prices of inputs used in its production • the technology of production • expectations • taxes and subsidies Supply

3. YOU COULD WRITE THE MODEL THIS WAY: The supply of lemon-lime: QS(lemon-lime) = S(Plemon-lime, Pcitric acid, Pcarbon dioxide, Plabor, . . . ,technology, expectations, taxes & subsidies) Supply

4. THE SUPPLY CURVE • The supply curve for any good shows the quantity supplied at each price, holding constant all other determinants of supply. • The DEPENDENT variable is the quantity supplied. • The INDEPENDENT variable is the good’s own price. Supply

5. THE LAW OF SUPPLY The Law of Supply says that an increase in a good’s own price will result in an increase in the amount supplied, holding constant all the other determinants of supply. The Law of Supply says that supply curves are positively sloped. Supply

6. A SUPPLY CURVE A supply curve must look like this, i.e., be positively sloped. supply own price quantity supplied Market for lemon-lime Supply

7. p0 Q0 The supply curve means: You pick a price, such a p0, and the supply curve shows how much is supplied. own price supply quantity supplied Market for lemon-lime Supply

8. If the price of lemon-lime rises, how is the supply curve affected? own price supply p0 quantity supplied Q0 Market for lemon-lime Supply Go to hidden slide

9. AN IMPORTANT POINT When drawing a supply curve notice that the axes are reversed from the usual convention of putting the dependent (y) variable on the vertical axis, and the independent (x) variable on the horizontal axis. Supply

10. ECONOMISTS HAVE HYPOTHESES ABOUT HOW CHANGES IN EACH OF THE INDEPENDENT VARIABLES AFFECTS THE AMOUNT SUPPLIED Supply

11. Other factors affecting supply The question here is how to show the effects of changes in input prices, technology, expectations, and taxes. The answer, of course, is that changes in input prices, technology, expectations, or taxes cause the supply curve to shift. Supply

12. Changes in input prices • Consider the supply of lemon-lime, and suppose the price of citric acid, a crucial input to lemon-lime, falls. Lemon-lime firms now find that lemon-lime production is more profitable than it was before, and they respond to this be increasing the supply of lemon-lime. Supply

13. The price of citric acid falls from $300 per ton to $100 per ton. own price supply @ citric acid price of $300/ton How will this affect the supply curve for lemon-lime? quantity Market for lemon-lime Supply Go to hidden slide

14. Change in technology • An improvement in technology makes it possible to produce a level of output with fewer inputs than before. • Because this lowers the cost of production, profits rise, and firms will try to supply more. Supply

15. Suppose lemon-lime technology improves. own price supply with old technology How does this affect the supply curve for lemon-lime? quantity Market for lemon-lime Supply Go to hidden slide

16. How would you suspect an excise tax affects the supply of a good? price S (no tax) Q Supply Go to hidden slide

17. Supply summary Supply is a function of own price, input prices, and technology. The supply curve shows supply as a function of own price, all else constant. Changes in a good’s own price show up as movements along a supply curve. Changes in input prices, technology, expectations, or taxes show up as shifts in the supply curve. Supply