APMacro: Supply


Supply is a schedule or curve showing the amounts of a product that producers are willing and able to make available for sale at each of a series of possible prices during a specific period. Supply shows a positive or direct relationship between price and quantity supplied. As price rises, the quantity supplied rises; as price falls, the quantity supplied falls. This relationship is called the law of supply.

Price is an obstacle from the standpoint of the consumer who is on the paying end. The higher the price, the less the consumer will buy. But the supplier is on the receiving end of the product’s price. To a supplier, price represents revenue, which serves as an incentive to produce and sell a product. The higher the price, the greater this incentive and the greater the quantity supplied.

Consider a manufacturer. Beyond some quantity of production, manufacturers usually encounter increasing marginal cost. Marginal cost is the added cost or producing one more unit of output. Certain productive resources, particularly the firm’s plant and machinery, cannot be expanded quickly, so firms uses more of other resources, such as labor, to produce more output. But as labor becomes more abundant relative to the fixed plant and equipment, the additional workers have relatively less space and access to equipment. As a result, each added worker produces less added output, and the marginal cost of successive units of output rises.

supply-graph-l3fig19

As with demand, it is convenient to represent supply graphically. The axes are the same as those used in our graph of market demand except for the change from quantity demanded to quantity supplied on the horizontal axis.

In constructing a supply curve, price is the most significant influence on the quantity supplied of any product. But other factors can and do affect supply. The supply curve is drawn on the assumption that these other things are fixed and do not change. If ine of them does change, a change in supply will occur, meaning that the entire supply curve will shift.

The basic determinants of supply are 1) resource prices, 2) technology, 3) taxes and subsidies, 4) prices of other goods, 5) price expectations, and 6) the number of sellers in the market. A change in any one or more of these determinants of supply or supply shifters, will move the supply for a product either right or left. A shift to the right signifies and increase in supply. Producers supply larger quantities of the product at each possible price. A shift to the left, indicates a decrease in supply. Producers offer less output at each price.

Supply v QSupplied

The distinction between a change in supply and a change in quantity supplied parallels the distinction between a change in demand and a change in quantity demanded. Because supply is a schedule or curve, a change in supply means a change in the schedule and a shift of the curve. An increase in supply shifts the curve to the right; a decrease in supply shifts it to the left. The cause of a change in supply is a change in one or more of the determinants of supply.

In contrast, a change in quantity supplied is a movement from one point to another on a fixed supply curve. The cause of such a movement is a change in the price of the specific product being considered.


Homework:
1) Read Chapter 3 Supply pp.50-53

Arrows-02-june

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