The law of Supply

1. The law of Supply When the price of a good rises, the quantity supplied will also rise • Costs rise as output increases. • Higher price means more profit. Firms will switch to the • production of this good from other goods. • 3.New producers will emerge. Total supply will increase.

2. Introductory Economics Lecture 4

3. Recap

4. SUPPLY SCHEDULE Supply schedule simply specifies the unit of a good that a producer is willing to supply i.e. Qs at alternative prices over a given period. Quantity Supplied = f (Price) A positive relationship exists between Qs & P

5. Summing Up

6. Price (P) ($ per bushel) 5 4 3 2 1

7. Individual producer supply curve P ($ per bushel) SL q (bushels per month)

8. Price (P) ($ per bushel) 5 4 3 2 1

9. Market supply curve P ($ per bushel) SM Q (bushels per month)

10. QS = f ( P CORN ) ceteris paribus ( All other things constant )

11. Other determinants of supply • Costs of production • profitability of alternative products (substitutes in supply) • Profitability of goods in joint supply • Nature and other random shocks • Aims of producers • Expectations of producers

12. A : Costs of production If production costs change then the amount supplied is likely to change. Costs change due to : • Changes in input prices. • Changes in technology. • Organizational changes. • Changes in govt policy

13. B: Profitability of alternative products (substitutes in supply) • A producer of two goods is more likely to concentrate on the production of the more profitable good

14. C: Profitability of goods in joint supply Variant on the previous case.

15. D: Nature and other random shocks Problems caused by weather, natural catastrophes & effects of war, also hazards like gulabi sundi and american sundi.

16. E: Aims of producers A firm may wish to maximize short run profit. The quantity supplied will obviously be affected by the aims of the producer.

17. F: Expectations of producers. Expectations of increase or decrease in the price in future. Expectations may prove to be wrong.

18. Determinants in context of supply of butter • A reduction in the cost of producing butter. • A reduction in the profitability of producing cream or cheese. • An increase in the profitability of skimmed milk. • If weather conditions are favorable, grass yields and hence milk yields are likely to be high. • If butter producers expect the price to rise in near future, they may decide to release less to the market now.

19. Shifts in supply curve S3 Price S1 S2 Quantity

20. Supply function QS = f ( Pg , Cg , a1 … an , j1 … jm , R , A , Pget+1 ) Quantity Supplied = Qs Price of the goods = Pg Profitability of alternative goods = a1…..an Profitability of the goods jointly supplied = j1….jm Nature and Other Random Shocks = R Aims of Producers = A Expected Price of good = Pge at some future time = t+1

21. QS = c + d P QS = - 500 + 1000P P = QS - C d d

22. Quantity Supplied S2 QS = - 200 + 1000 P S0 QS = - 500 + 1000 P S1 QS = - 800 + 1000 P Price -200 -500 -800

23. Price S1` S0` S2` 4/5 1/2 1/5 Quantity

24. Important points • When d changes 1/d also changes • Where 1/d is the slope of supply curve in PQ space. • Higher the d flatter is the supply curve in PQ space. • Lower the d steeper is the supply curve in PQ space. • Complex Supply Equations • Qs = 200 + 80P – 20a1 – 15a2 + 30j

25. Equilibrium P Supply (S) E Equilibrium Price Demand (D) Q Equilibrium Quantity

26. Equilibrium for corn market P Supply (S) Excess Supply of 2500 4 3 E 2 Demand (D) Excess Demand of 4000 Q 4000 4750 6000 7250 8000

27. Algebraic representation of equilibrium QD = 100 – 10 P QS = 40 + 20 P QD = QS

28. Algebraic representation of equilibrium QD = QS 100 – 10 P = 40 + 20 P 100 – 40 = 20 P + 10 P 60 = 30 P 30 P = 60 P = 2 Thus equilibrium price is $2

29. Algebraic representation of equilibrium Equilibrium Quantity Demanded QD = 40 + 20(2) = 80 Equilibrium Quantity Supplied QS = 100 – 10 (2) = 80