Chapter 4 SUPPLY ANALYSIS 2 nd Sem , S.Y 2013-2014

1. Chapter 4 SUPPLY ANALYSIS 2ndSem, S.Y 2013-2014

2. Supply Analysis The analysis of the supply of produced goods has two parts: • An analysis of the supply of the factors of production to households and firms. • An analysis of why firms transform those factors of production into usable goods and services.

3. Supply is the willingness and ability of producers to offer or sell good and services for sale. Supply for a product is the amount of the good or service that producers in a market are willing and able to sell at a certain price, ceteris paribus (others variables held constant). Supply

4. Law of supply – direct relationship between price and quantity supplied. It states that producers are willing to sell more of a good or service at a higher price than they are at a lower price The Law of Supply

5. The Law of Supply Law of Supply • As the price of a product rises, producers will be willing to supply more. • The height of the supply curve at any quantity shows the minimum price necessary to induce producers to supply that next unit to market. • The height of the supply curve at any quantity also shows the opportunity cost of producing the next unit of the good.

6. Economic Models in Supply Analysis • Supply Schedule • Supply Curve • Supply Function

7. Supply schedule a table that shows the relationship between the price of a good and the quantity supplied. This reflects the various quantities of the product that will be sold at various prices at a specific time and place. It can be an individual or a market supply schedule. Market supply schedule is the sum of all the individual supply for a particular good Supply Schedule

8. Market supply refers to the sum of all individual supply for a particular good or service. Graphically, individual supply curves are summed horizontally to obtain the market demand curve. Individual Supply vs. Market Supply

9. A. Individual Supply Schedule for Tomatoes in Pangasinan B. Market Supply Schedule for Tomatoes in Pangasinan Tomatoes supplied per month Tomatoes supplied per month Price per kilo Price per kilo 500 400 300 200 100 A B C D E A B C D E 50 40 30 20 10 50 40 30 20 10 10,000 8,000 6,000 4,000 2,000 A Sample Supply Schedule

10. The supply curveis the graphical representation of the law of supply. The supply curve slopes upward. The slope tells us that the quantity supplied varies directly – in the same direction – with the price. Supply Curve

11. PA A Price (per unit) 0 QA Quantity supplied (per unit of time) A Sample Supply Curve Supply Curve

12. A. Supply Schedule for Tomatoes in Pangasinan Tomatoes supplied per week Price per kilo A B A B C D E 50 40 30 20 10 500 400 300 200 100 Supply of Tomatoes C E D From a Supply Schedule to a Supply Curve B. Supply Curve 60 50 40 Price per kilo (In pesos) 30 20 10 0 100 200 300 400 500 Quantity of Tomatoes supplied (per month)

13. Suppose that you want to analyze the market supply of cabbage in Baguio City. You survey all the farms that produce and sell cabbage and determine how many kilos they are willing to sell at various prices. If your survey enables you to make a market supply schedule, create a hypothetical supply schedule for cabbage. Use this market supply schedule to draw a market supply curve and derive a supply equation. Let’s Check Your Understanding

14. A. Supply Schedule for Tomatoes in Pangasinan Tomatoes supplied per week Price per kilo A B C D E 50 40 30 20 10 500 400 300 200 100 Supply Function • Supply Function shows the relationship between the quantity supplied and the price of the good (and other factors). In simple terms, quantity supplied is a function of price…[Qd = f (P…) ]. • The supply function is given by the equation • In the given supply schedule, the supply equation can be derived using the two-point form in finding the equation of a line. The formula is

15. Let’s Check Your Understanding! • From the following table of prices of branded jeans and quantity supplied (in thousands of jeans), draw the supply curve for branded jeans. Describe the curve.

16. The supply curve for a product is represented by the equation,, where is quantity supplied and is price. What is the quantity supplied if the price is Php 500? What is the price if the quantity supplied is 400 units? What is the highest price to be paid for this commodity? What quantity would be supplied if the product is free? What is the inverse equation of the supply curve? Graph the supply curve Let’s Check Your Understanding!

17. Supply refers to a schedule of quantities a seller is willing to sell per unit of time at various prices, other things constant. Quantity supplied refers to a specific amount that will be supplied at a specific price. Supply versus Quantity Supplied

18. Change in Quantity Supplied vs. Change in Supply • Change in quantity supplied • caused by a change in the price of a good. • the movement of points within the same supply curve. • Change in supply • the changes in the quantity supplied brought about by any of the non-price determinants of supply (input cost, technology, taxes and subsidies, etc.) and not by price (which is constant).

19. A movement along a supply curveis the graphical representation of the effect of a change in price on the quantity supplied. Movements Along a Supply Curve vs.Shifts in Supply A shift in supplyis the graphical representation of the effect of anything (factors affecting supply) other than price on supply.

20. B 50 Change in quantity supplied (a movement along the curve) Price (per unit) A 25 0 200 100 Quantity supplied Change in Quantity Supplied S1

21. 50 Price (per unit) 30 S2 S1 D1 100 Quantity Supplied Shift in Supply S0 Decrease in Supply Increase in Supply 250

22. Let’s Check Your Understanding! Determine whether the following will have effect on the change in the quantity supplied or change in supply. Show the effect through a graph. • The price of notebook computers sharply falls so many manufacturers produce less. • New technologies have made it possible to build large cruise ships, Econ cruise lines offer more cabins, at lower prices, than before. • Econ Phone develops an effective wireless technology thus, it increases the supply of cell phones • An increase in the number of Internet service providers increases the supply of such services. • Coco lumber firms expect that there will be a substantial rise in future prices of coco lumbers, thus the firms decrease their supply of coco lumbers today.

23. Determinants of Supply Input Costs Technology and Labor Productivity Prices of Substitutes and Complements Taxes and Subsidies Producer Expectations Number of Producers Weather

24. Supply Shifters are factors that cause shifts in the supply curve: Input Costs or Resource Prices The prices of related good Technology and Labor Productivity Number of Sellers Future Price Expectation Taxes and Subsidies Weather Non-price Determinants of Supply

25. Input costs are the price of the resources needed to produce a good or service When costs go up, profits go down, so that the incentive to supply also goes down. Supply will increase when the cost of inputs falls, and vice versa. Input Costs

26. Input Costs – Shift in the Supply Curve Increase in Supply Decrease in Supply

27. Substitutes – are often pairs of goods that are used in place of each otherin production process. Complements - are pairs of goods that are used together in production of a good or service. Prices of Related Goods

28. PRR (Substitutes) – Shift in the Supply Curve Increase in Supply Decrease in Supply

29. PRR (Complements) – Shift in the Supply Curve Increase in Demand Decrease in Demand

30. Involves the application of scientific methods and discoveries to the production process, resulting in new products or new manufacturing techniques. Improvements in technology enable producers to spend less on inputs yet still produce the same output. When a better technology becomes available, reducing the cost of production, supply increases, and the supply curve shifts to the right. Technology

31. It is the amount of goods and services that a person can produce in a given time. Increasing productivity decreases the costs of production and therefore increases supply. Better-trained and more-skilled workers can usually produce more goods in less time, and therefore at lower costs, than less-educated or less-skilled workers Labor Productivity

32. Technology– Shift in the Supply Curve Increase in Demand Decrease in Demand

33. If producers expect the price of their product to rise or fall in the future, it may affect how much of that product they are willing and able to supply in the present. For example, if a farmer expects the price of corn to be higher in the future, he may store some of the current crop, thereby decreasing supply. Producer Expectation

34. Producer Expectation – Shift in the SC Increase in Supply Decrease in Supply

35. An increase in the number of producers means increased competition, which may eventually drive less-efficient producers out of the market, decreasing supply. When one company develops a successful new idea, whether it’s the latest generation of cell phones, or fast-food meal, other producers soon enter the market and increase the supply of the good or service. When this happens, the supply curve shifts to the right. Number of Producers

36. Number of Sellers – Shift in the Supply Curve Increase in Supply Decrease in Supply

37. An excise tax is a tax on the production or sale of a specific good or service. Excise taxes are often placed on items such as alcohol and tobacco— things whose consumption the government is interested in discouraging. Taxes like excise tax increase producers’ costs and, therefore, decrease the supply of goods. Taxes tend to decrease supply; subsidies have the opposite effect. Asubsidy is a government payment that partially covers the cost of an economic activity. The subsidy’s purpose is to encourage or protect that activity. Taxes and Subsidies