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Chapter 4 : Supply

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Miss Cummins

on 4 November 2016

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Transcript of Chapter 4 : Supply

Other Circumstances of Supply
Supply restricted by a minimum market price
What is Supply?
Chapter 4 : Supply

Supply refers to the quantity of a good that firms are willing to make available at various prices over a particular period
Producer Surplus
This is the difference between the lowest price a supplier is willing to accept for a good and the price they actually receive
Jean Baptise Say (1767-1832)
Say’s Law – ‘supply creates its own demand’
People work to acquire needs/wants
Specialisation of labour
Production creates demand
Savings decrease interest rates
Self-adjusting system

There can be a Movement Along or a Shift in the Supply Curve
The Economist's Garden Centre Exercise
Book pg 53
The previous chapter focused on Demand and the factors that influence buyers. The other side of demand is supply - which focuses on the sellers.
Individual Supply
This refers to the quantity of a good supplied by an individual firm at different prices
Market/Aggregate Supply
This refers to the quantity of a good supplied by all the firms in the market at different prices
Supply Schedule
A table showing the different quantities of a good made available for sale at various market prices at any given time
Individual Supply Schedule
Table showing the different quantities of a good made available for sale by an individual firm at various market prices at any given time
Market/Aggregate Supply Schedule
Table showing the total quantities of a good that all the firms in the market are willing to make available for sale at various prices at any given time
Supply Curve
Graph illustrates the number of units of a good made available for sale at various market prices at any given time
The curve is usually upwards sloping from left to right
There is a positive relationship between price and quantity supplied
P
Q
**** As the price increases, quantity supplied increases
Individual Supply Curve
- graph showing the different quantities of a good made available for sale by an individual firm at various market prices at any given time
Market/Aggregate Supply Curve
- graph showing totally quantities of a good all the firms in the market are willing to make available for sale at various prices at any given time
Fixed supply
Supply restricted by limited capacity
Supply Restricted by a Minimum Market Price
In order or a firm to stay in production they must cover their costs
So that means that no producer would enter the market until this minimum price has been reached
Which means they would make a loss
Any price below this level will not cover a firms costs
Therefore, many goods and services will not be supplied if the market is below a certain minimum price
Example
Let's say that a plant a gardening centre has the following costs
Seeds = 10c
Pot = 50c
Wages of staff to sell plant = €3
Plant food/water = €1
Total cost = €4.60
It would make absolutely no sense to sell this plant for anything less than €4.60
P
Q
P1
Q1
S
Below P1 nothing is supplied
Above P1, QS is increased
As p increases, Q increases
Supply Restricted by Limited Capacity
Once the maximum capacity is reached, the quantity supplied remains the same no matter what the price
Firms productive capacity
Shortage of specialised labour
Shortage of raw materials
An industry's capacity to supply good may be limited
Examples:
Example
: A garden centre might only be able to stock 10,000 plants.

This means that it cannot hold any more goods available for sale.

As a result, supply is restricted.
P
Q
P1
Q1
S
Fixed Supply
Example:
Perfectly inelastic supply (discussed in later chapters)

This occurs when the supply of a product cannot be changed in the short run - no matter what the price is

Perishable goods - supply of fish on a given day
Supply of land
Seating capacity of a stadium
P
S
Q
Any change in P won't change QS
Entire daily supply must be sold regardless of the price because good cannot be held for sale over the following days
Fixed Supply Curve
Example
There are 20,000 tickets for a concert but there is a demand for 60,000
Then no matter what price is offered for the tickets, the supply of seats is fixed
If there are only 20,000 seats in the concert venue
The Movement Along the Supply is caused by a change in _______ of the good or service
PRICE
Firms produce more of a product at a higher price and less at lower prices
An increase in the price of a good will result in an increase in QS
A decrease in the price will result in a decrease in the QS
A Shift in the supply curve is caused by a change in any __________ determinant of supply
NON-PRICE
A shift in the supply curve illustrates the different quantity supplied at the same price

The curve can shift to the right or left
An increase in Supply
If there is an increase in quantity supplied of a good, the supply curve will
shift
to the
right
from Sx to S1
A Decrease in Supply
If there is a decrease in the quantity supplied of a good, the supply curve will
shift
to the
left
from Sx to S2
What factors Affect the Supply of a Good ??
Supply function
Sy = f (Py, Pr, C, U, Tch, Tx, O, N)
Py = Price of Good Y
Pr = Price of related goods
C = Cost of production
U = Factors outside the control on the firms

Tch = State of Technology
Tx = Taxation/subsidy
O = Objectives
N = Number of firms in the industry
1. Supply of a Good Depends on Its Own Price
2. Supply of a Good Depends on Prices of Related Goods
3. Supply of a Good Depends on the Cost of Production
4. Supply of a Good Depends on Factors Outside the Control of Firm/Unforeseen Circumstances
5. Supply of a Good Depends on the State of Technology
6. Supply of a Good Depends on the Rates of Taxation/Granting of Subsidies
7. Objectives of the Firm
8. Number of Sellers in the Industry
A
RISE
in the price of a good, the quantity supplied will generally respond and also rise
As the price rises the firm will receive more money
This is because it becomes more profitable for firms to supply the goods
And it acts as a deterrent to new entrants and may even see some existing firms leave the market (shut down)
Production and supply of the product become less profitable
If price
DECREASES
then the opposite will happen
As this happens, more firms will be attracted to the market and they will also start supplying the good
The price of related goods refers to other goods that
THE SUPPLIER
could produce as an
alternative
to those currently being produced
If the price of a related good
rises
,
it will become a much more attractive and profitable alternative to switch its resources to the production of the related good
irrespective of whether the price of the good the firm is currently producing remains the same or falls
,
Example:
Computer manufacturing company realises that the price of tablets is increasing while the price of laptops remains constant
The supply of laptops will then go down
Company will switch resources to producing tablets
This increase in the price of tablets is attractive and more profitable to produce
P
P
Q
Q
S1
S1
S2
S2
Increase in Pr = fall in QS of Good Y
Decrease in Pr = increase in QS of Good Y
** A fall in price of tablets causes increase in supply of laptops
To make a good a supplier combines raw materials, capital and labour
This is all taken into consideration by the firm
If the cost of these factors increase then it will be more expensive to make the good
The firm will not continue to supply the same quantity of the good at the old price
This results in a reduction in the quantity supplied
Causes of an increase in the cost of production?
Rise in labour costs
Rise in the cost of raw materials
Increase in taxes
Reduction in subsidies
Causes of a decrease in the cost of production?
Fall in labour costs
Fall in the cost of raw materials
Reduction in taxes
Increase in subsidies
There may be a change in supply that was never intended by the producer
Can cause an increase or decrease in supply
Cannot be forecasted
Favourable and Unfavourable
Examples of unforeseen circumstances that would lower supply in a garden centre:
Transport failures restricting the movement of pots and seeds
Shortage of raw materials
Strikes by workers
Unfavourable weather conditions may result in a lower yield of plants
P
P
Q
Q
S1
S1
S2
S2
Favourable unplanned factors = increase in QS (shift to the right)
Unfavourable unplanned factors = decrease in QS (shift to the left)
Technology is a cost reducing innovation
We generally don't speak about a 'fall' in technology - why?
Example - Computer prices
These advancements in technology will cause an increase in quantity supplied of a good (Good Y)
Allows firms to produce an item at a lower cost
New machinery is invented all the time
Labour is becoming more specialised
This means factors of production become more efficient
It then becomes possible to increase output
This may result in using inputs more efficiently
This means cost of producing a unit of output may fall
Taxation
Subsidies
Tax = financial charge
Reduction = reduction in cost of raw materials/production
This may force some firms out of production
And this will then decrease the quantity supplied to the market
Quantity supplied will increase
As level of taxes increase, a firms profit will decrease
Subsidies = sums of money granted by the state
Increase for raw materials/labour = reduction in costs
This means quantity supplied will increase
Decrease will have opposite effect
Increase in taxation/decrease in subsidies = shift to the left
Decrease in taxation/increase in subsidies = shift to the right
If a firms objectives change from that of profit maximisation to satisfactory profit - quantity supplied may fall
Objectives = goals
Example
Her objective is to earn satisfactory profit levels but to also have family time.
Profit maximisation is not the objective of this B&B as the weekend would be very busy.
The owner decided to close on a Saturday at 2pm and not accept guest until the following Tuesday at 2pm, giving herself the weekend off to spend with her family.
B&B owner in Killarney is open 7 nights a week and has no family time
If the number of sellers in the industry increased due to an increase in quantity demanded, then the over all quantity supplied to the market would increase
If the number of sellers in an industry decreased = overall quantity supplied to the market would decrease
Full transcript