Microeconomics Pt.3: What Is Supply?

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Transcript Microeconomics Pt.3: What Is Supply?

Microeconomics
Pt.3:
What Is Supply?
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The concept of supply is based on voluntary decisions made by producers on
how much of a good to produce and sell to consumers.
Supply, then, is defined as the amount of a product that would be offered
for sale at all possible prices that could occur in the marketplace.
Because producers receive money for the products they sell, it comes as no
surprise that they will try to sell more items at higher prices and thus, make
a profit.
This forms the basis for the Law of Supply, which is the principle that
suppliers will normally try to offer more of an item for sale at higher prices
and less of an item at lower prices.
The promise of high prices, and hopefully higher profits, is what lures
businesses into entering the U.S. Free Enterprise Market.
All suppliers of products must decide how much to offer for sale at various
prices, a decision made by businesses according to what they think is best
for the individual seller.
However, in the end, it is consumers themselves who decide what is best for
them and ultimately influence the cost and supply of businesses goods.
B) The Individual Supply Schedule and Curve
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Similar to the Demand Schedule, the Supply Schedule is a listing
of the various quantities of a particular product supplied by a
business at all possible prices in the market. Figure 1, presents a
hypothetical Supply Schedule for CD’s.
Figure 1 shows the quantities of CD’s that will be supplied at
various prices in the marketplace. Furthermore, Figure 1 shows
that when the quantity supplied goes up, the price goes up as well.
The data presented in the supply schedule can also be illustrated
graphically as an upward-sloping line, as shown in Figure 1.
To draw this graph, all we have to do is transfer the information
on the Supply Schedule over to the graph and then connect the
points to form a curve.
The result is a Supply Curve, a graph showing the various
quantities supplied at all possible prices that might occur in the
market at any given time.
All normal supply curves have a positive slope that goes up from
the lower left-hand corner of the graph to the upper right-hand
corner. This, of course, shows that if the price of an item goes up,
the quantity supplied will go up too.
The Supply Curve
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The
Market
Supply
Curve
The Supply schedule and curve in Figure 1 shows the information of a
single company. Frequently, however, we are more interested in the
Market Supply Curve, which is the supply curve that shows the
quantities offered at various prices by all companies that offer the
product for sale in a given market.
To obtain the data for the market supply curve, add the number of
CD’s that individual companies would produce, and then plot them on
a separate graph.
In Figure 2, point A, the market supply curve represents six CD’s –
four supplied by the first company and two by the second – that are
offered for sale at the price of $15.
In the same way, point B on the curve represents a total of nine CD’s
offered for sale at a price of $20 by the same two companies.
A Change In Quantity Supplied is a change in the amount supplied
by a company in response to a change in price. This change is
illustrated as a change on the Supply Curve which - like the case of
demand – is shown as a movement along the Supply Curve Graph
line.
Note that the change in quantity supplied can be a increase or
decrease, depending on whether more or less of a product is offered.
For example, the movement from A to B in Figure 1 shows an change
in quantity.
If the movement along the supply curve had been from point B to point
A, there would have been a decrease in quantity supplied because
the number of products offered for sale went down.
D) Change in Supply
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Sometimes something happens to cause a Change
in Supply, a situation where suppliers supply
different amounts of a product for sale but the price
does not change.
When this happens, we look at external situations
that could cause the quantity supplied to change
even though the price remains the same.
For example, the supply schedule in Figure 3 shows
that producers are now willing to offer more CD’s for
sale at the same price. Where 6 units were offered
at a price of $15, now there are 13.
When we take both the old and new quantities
supplied of an item and plot them on a graph, it
appears as if the supply curve has shifted to the
right, showing an increase in supply.
For a decrease in supply to occur, less items would
be offered for sale but the price would remain the
same, thus the supply curve shifts to the left.
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Change in Supply
E) Specific Reasons for a Change in Supply
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These changes in supply, whether an increase or a decrease, can occur for several reasons.
A change in the cost of constructive inputs of a good such as land, labor and capital can
cause a change in supply.
Supply might increase because of a decrease in the cost of constructive inputs of a good
such as labor or packaging. If the price of the constructive inputs drops, companies are
willing to produce more of a product, thereby shifting the supply curve to the right.
When management of a business trains or motivates its workers, their productivity of
creating a good usually goes up. If this happens, the supply curve is shifted to the right,
because more of an item is being supplied by workers.
On the other hand, if workers are unmotivated, untrained, or unhappy, then productivity
a creating a good could decrease. If this happens, the supply curve shifts to the left
because fewer goods are produced at every possible price.
Furthermore, new technology tends to shift the supply curve to the right. However, new
technologies do not always work correctly or can break down. Because of this, the supply
curve shifts to the left.
When the Federal or State Govt.’s establishes new restrictive, or tighter, regulations on
the business world, the cost for production of a good can change, which in turn causes a
change in supply.
These restrictions often cause the supply curve to shift to left. However, less restrictions
can cause the supply curve to the shift to the right.
Finally, as more companies enter the market economy, the supply curve shifts to the right
because more products are now being offered for sale at the same price as before. In other
words, the larger the number of suppliers, the greater the market supply of an item.
However, if some companies go bankrupt and leave the marketplace, fewer products are
now offered for sale. This causes supply to decrease and shifts the curve to the left.
1 Versus 100
Supply and
Demand Graph
The Demand Curve
The Supply Curve