The Theory of Supply

The Theory of Supply

by K Norman

​Objectives:

1. Understand the Market Force Supply

2. Draw the supply curve and analyze its shifts and movements

3. Understand the determinants of supply

4. Discuss the effects of a tax and subsidy on the supply and market price of a commodity​

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​What is supply?

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Supply refers to the amount of a good or service firms or producers are willing to make and sell at a different price levels.

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​Quantity supplied refers to the amount of a good or service producers are willing and able to make and sell to consumers in a market.

​Industry, Firm and Industry Supply

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​A firm is a single supplier

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​An Industry is made up of a number of firms selling the same products.

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​Industry supply is the sum total of the output of all firms in the industry and they are willing to sell their products at a particular price.

​THE LAW OF SUPPLY

​The Higher the Price the more will be supplied. The Lower the price, the less will be supplied, ceteris paribus.

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The Supply Curve is an upward sloping curve with a positive relationship to price.

​The supply curve is a graphical representation of various quantities that firms are willing to provide at different price levels.

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​We plot the curve from a supply schedule.

Open Ended

What Factors do you think will determine supply of products in a market?

What determines Supply?

• ​Price of the Product

• Technology

• ​Factor Costs

• ​Number of sellers

• ​Taxes and subsidies

• ​Expectations

• ​Government restrictions

• ​Weather conditions

​Movements along the Supply Curve

​A change in Price causes a movement along the supply curve.

​SHIFTS OF THE SUPPLY CURVE

​There are other factors that affect supply decisions other than price. New relationships between price and quantity supplied come about when factors other than price changes, as a result the supply curve shifts.

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Price Falls --> Supply decreases

​Shifts to the Left

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​Price Increases --> Supply Increases Shifts to the Right

​Let's see what you learned today !

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​In the following scenarios, consider the effect on supply

Multiple Choice

Auto Workers’ Union Agrees to Wage Cuts

• contraction

• extension

• shift left

• shift right

Multiple Choice

New Robot Technology Increases

Efficiency

• contraction

• extension

• shift left

• shift right

Multiple Choice

Nationwide Auto Strike Began at Midnight

• contraction

• extension

• shift left

• shift right

Multiple Choice

Cost of Steel Rises

• contraction

• extension

• shift left

• shift right

Multiple Choice

Quality of production

technology increases

• contraction

• extension

• shift left

• shift right

Multiple Choice

Price of peanuts increase

• contraction

• extension

• shift left

• shift right

Multiple Choice

Number of cell phone

manufacturers increase

• contraction

• extension

• shift left

• shift right

Multiple Choice

Government imposes restrictions on the importation of light bulbs

• contracts

• extends

• shifts left

• shifts right

​END OF LESSON