Transcript chapter5 File

CHAPTER 5
THEORY OF SUPPLY
CHAPTER 5 Supply
If a firm supplies a good or service, the
firm
–
–
–
Has the resources and technology to
produce it.
Can profit from producing it.
Has made a definite plan to produce it and
sell it.
Supply
The quantity supplied of a good or
service is the amount that producers
plan to sell during a given time period at
a particular price.
Supply
What determines selling plans?
–
The price of the good.
–
The prices of resources used to produce the
good.
–
The prices of related goods produced.
–
Expected future prices.
–
The number of suppliers.
–
Technology.
Supply
The Basic Law of Supply (p.72)
Other things remaining the same, the
higher the price of a good, the greater is
the quantity supplied, lower the price, the
smaller the quantity offered for sale.
Supply
Supply Curve and Supply Schedule
Supply curves show the relationship
between the quantity supplied of a good
and its price (ceteris paribus).
Supply schedules list the quantities
supplied at each different price (ceteris
paribus). Also read market supply schedule
(page 73).
Supply
Price
Quantity
(dollars per tape)
(millions of tapes per week)
a
1
0
b
2
3
c
3
4
d
4
5
e
5
6
Supply
Price (dollar per tape)
6
Supply of Tapes
5
e
4
d
3
c
2
1
0
b
a
2
4
6
8
10
Quantity (millions of tapes per week)
Supply in the Construction Industry (p.74)
• Many firms contribute to the supply of
construction products, including large
national contractors, material
manufacturers, plant hirers and local site
labourers.
• Read Table 5.2 Construction industry
supply in Great Britain, 2006
Supply and Price Determinant (p76)
• Supply and Non-Price Determinants
•
•
•
•
Cost of Production
Government
Supply Chain Management
Expectations
Supply
Understanding Changes in Supply
When any factor that influences selling
plans other than the price of the good
changes, there is a change in supply.
• An increase in supply causes the supply
to shift rightward.
• A decrease in supply causes the supply
curve to shift leftward.
A Change in Supply
• Price of Productive Resources
• Price of Related Goods Goods Produced
–
Substitutes in Production
–
Complements in Production
• Expected Future Prices
A Change in Supply
• The Number of Suppliers
• Technology
Supply
Original supply schedule
New supply schedule
New technology
Old technology
Price
(dollars
per tape)
Quantity
Price
(millions of tapes
per week)
Quantity
(dollars
per tape)
(millions of tapes
per week)
a
1
0
a'
1
3
b
2
3
b'
2
6
c
3
4
c'
3
8
d
4
5
5
6
4
5
10
e
d'
e'
12
Price (dollar per tape)
Supply
6
Supply of tapes
(old technology)
5
4
c
2
0
d'
d
3
1
e'
e
c'
b
b'
a'
a
2
4
6
8
Supply of tapes
(new technology)
10
12
14
Quantity (millions of tapes per week)
The Supply of Tapes
The Law of Supply
The quantity of tapes supplied
Decreases if:
The price of a tape falls.
Increases if:
The price of a tape rises.
The Supply of Tapes
Changes In Supply
The supply of tapes
Decreases if:
• The price of a resource used to produce
tapes rises.
• The number of tape producers
decreases.
• The price of a substitute in production
rises.
The Supply of Tapes
Changes In Supply
The supply of tapes (cont.)
Decreases if:
• The price of a complement in production
falls.
• The price of a tape is expected to rise in
the future.
The Supply of Tapes
Changes In Supply
The supply of tapes
Increases if:
•
•
•
The price of a resource used to produce
tapes falls.
More efficient technologies for producing
tapes are discovered.
The number of tape producers increases.
The Supply of Tapes
Changes In Supply
The supply of tapes (cont.)
Increases if:
•
•
•
The price of a substitute in production falls.
The price of a complement in production
rises.
The price of a tape is expected to fall in the
future.
A Change in the Quantity Supplied Versus a
Change in Supply
A movement along a supply curve,
which results from a change in price,
shows a change in the quantity
supplied.
If some other influence on sellers’ plans
changes, holding price constant, there
is a change in supply.
Price
A Change in the Quantity Supplied Versus a Change in
Supply
Increase in
S2 quantity
supplied
Decrease in
supply
S0
S1
Increase in
supply
Decrease in
quantity
supplied
Quantity
Market Equilibrium
Equilibrium in a market occurs when the
price balances the plans of buyers and
sellers.
Equilibrium price is the price at which
quantity demanded equals quantity
supplied.
Equilibrium quantity is the quantity bought
and sold at the equilibrium price.
Market Equilibrium
Price as a Regulator
–
–
If the price is too low, quantity demanded
exceeds quantity supplied.
If the price is too high, quantity supplied
exceeds quantity demanded.
Market Equilibrium
Price
Quantity
demanded
Quantity Shortage(–)
supplied or surplus(+)
(dollars
(millions of tapes per week)
per tape)
1
2
9
6
0
3
3
4
4
4
3
5
5
2
6
Market Equilibrium
Price
Quantity
demanded
Quantity Shortage(–)
supplied or surplus(+)
(dollars
(millions of tapes per week)
per tape)
1
2
9
6
0
3
-9
-3
3
4
4
0
4
3
5
+2
5
2
6
+4
Price (dollar per tape)
Market Equilibrium
Surplus of
2 million tapes
at $4 a tape
6
Supply of tapes
5
4
Equilibrium
3
2
Shortage of
3 million
tapes at $2
a tape
1
0
2
4
6
Demand for tapes
8
10
Quantity (millions of tapes per week)
Market Equilibrium
Price Adjustments
–
–
A shortage forces the price up.
A surplus forces the price down.
Such price changes are mutually beneficial to
both buyers and sellers.
Predicting Changes in
Price and Quantity
A Change in Demand
What would happen to the price and
quantity of tapes if the price of a
Walkman falls from $200 to $50?
The Effects of a Change in Demand
Quantity demanded
Price
(dollars
per tape )
week)
(millions of tapes per week)
Quantity supplied
Walkman $200 Walkman $50
(millions of tapes per
1
2
9
6
0
3
3
4
4
4
3
5
5
2
6
The Effects of a Change in Demand
Quantity demanded
Price
(dollars
per tape )
week)
(millions of tapes per week)
Quantity supplied
Walkman $200 Walkman $50
(millions of tapes per
1
2
9
6
13
10
0
3
3
4
8
4
4
3
7
5
5
2
6
6
Price (dollar per tape)
The Effects of a Change in Demand
Supply of tapes
6
5
4
3
2
Demand for tapes
(Walkman $50)
1
0
Demand for tapes
(Walkman $200)
2
4
6
8
10
12
14
Quantity (millions of tapes per week)
A Change in Demand
Prediction
–
–
When demand increases, both the price and
quantity increase.
When demand decreases, both the price and
quantity decrease.
Predicting Changes in
Price and Quantity
A Change in Supply
What would happen to the price and
quantity of tapes if a new cost-saving
production technology was developed?
The Effects of a Change in Supply
Quantity supplied
Price
(dollars
per tape )
Quantity demanded
(millions of tapes per week)
(millions of tapes per week)
old
new
technology technology
1
2
9
6
0
3
3
4
4
4
3
5
5
2
6
The Effects of a Change in Supply
Quantity supplied
Price
(dollars
per tape )
Quantity demanded
(millions of tapes per week)
(millions of tapes per week)
old
new
technology technology
1
2
9
6
0
3
3
6
3
4
4
8
4
3
5
10
5
2
6
12
Price (dollar per tape)
The Effects of a Change in Supply
Supply of tapes
(old technology)
6
5
4
Supply of tapes
(new technology)
3
2
1
Demand for tapes
0
2
4
6
8
10
12
14
Quantity (millions of tapes per week)
A Change in Supply
Prediction
–
–
When supply increases, the quantity
increases and the price falls.
When demand decreases, the quantity
decreases and the price falls
Elasticity
• Elasticity is a measurement of the degree of
responsiveness of supply to a change in price.
•
•
•
•
•
Price Elasticity of Supply=(%ΔQs / %ΔP)
1. Price-inelastic supply
2. Price-elastic supply
3. Unit-elastic supply
Perfectly inelastic supply (Fig. 5.3 page 81)
Predicting Changes in
Price and Quantity
COMBINING SUPPLY AND DEMAND (p.82)
A Change in Both Demand and Supply
What would happen if both demand and
supply change together?
The Effects of an Increase in
Both Demand and Supply
Original Quantities
(millions of tapes per week)
Price
(dollars
per tape )
Quantity Quantity
demanded supplied
Walkman
$200
New Quantities
(millions of tapes per week)
Quantity Quantity
demanded supplied
old
technology
Walkman
$50
1
2
9
6
0
3
4
4
4
5
3
2
5
6
3
new
technology
The Effects of an Increase in Both
Demand and Supply
Original Quantities
(millions of tapes per week)
Price
(dollars
per tape )
Quantity Quantity
demanded supplied
Walkman
$200
old
technology
New Quantities
(millions of tapes per week)
Quantity Quantity
demanded supplied
Walkman
$50
new
technology
1
2
9
6
0
3
13
10
3
6
3
4
4
8
8
4
3
5
7
10
5
2
6
6
12
Price (dollar per tape)
The Effects of an Increase in
Both Demand and Supply
Supply of tapes
(old technology)
6
Supply of tapes
(new technology)
5
4
3
2
Demand for tapes
(Walkman $50)
1
Demand for tapes
(Walkman $200)
0
2
4
6
8
10
12
14
Quantity (millions of tapes per week)
A Change in Both
Demand and Supply
Prediction
–
–
When both demand and supply increase,
the quantity increases and the price
decreases, or remains constant.
When both demand and supply decreases,
the quantity decreases and the price
increases, decreases, or remains constant.
The Effects of an Decrease in Demand and an
Increase in Supply
Original Quantities New Quantities
(millions of tapes per week)
Price
(dollars
per tape )
Quantity Quantity
demanded supplied
CD player
$400
old
technology
1
2
13
10
0
3
3
8
4
4
7
5
5
6
6
(millions of tapes per week)
Quantity Quantity
demanded supplied
CD player
$200
new
technology
The Effects of an Decrease in Demand and an
Increase in Supply
Original Quantities New Quantities
(millions of tapes per week)
Price
(dollars
per tape )
Quantity Quantity
demanded supplied
CD player
$400
old
technology
(millions of tapes per week)
Quantity Quantity
demanded supplied
CD player
$200
new
technology
1
2
13
10
0
3
9
6
3
6
3
8
4
4
8
4
7
5
3
10
5
6
6
2
12
Price (dollar per tape)
The Effects of an Decrease in Demand and an
Increase in Supply
Supply of tapes
(old technology)
6
Supply of tapes
(new technology)
5
4
3
2
Demand for tapes
(CD player $400)
1
Demand for tapes
(CD player $200)
0
2
4
6
8
10
12
14
Quantity (millions of tapes per week)
The Effects of an Decrease in Demand and an
Increase in Supply
Prediction
–
–
When demand decreases and supply
increases, the price falls and the quantity
increases, decreases, or remains constant.
When demand increases and supply
decreases, the price rises and the quantity
increases, decreases, or remains constant.
Price (P)
Mathematical Note
Intercept on
y axis is a
a
Demand Curve
P = a - bQD
Slope is - b
Demand
0
Quantity demanded (QD)
Price (p)
Mathematical Note
Market
equilibrium
Supply
P*
Demand
0
Q*
Quantity supplied (Qs)
The End