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Theory of Supply
Producers will make more of a good/service as price of the good/service
rises; conversely, less will be made when prices fall
 “producer” usually one or more different entities that face various
costs of production (only produce if costs < benefits)
 example: transportation of timber
Like demand, theorize a supply curve per producer; add across quantities
to derive an aggregate supply curve
p
p
q
p
q
q
price
quantity
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Movement along vs. curve shift
Changes in the price of the good/service cause movement along
the curve
Supply shifters:
 technology
 costs of inputs to production
 barriers to entry (or lack thereof)
 prices of substitutes and complements in production
 future expectations, others …
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Terminology
Recall: total revenue = price * quantity
price
Market price
PS
total variable
cost
quantity
marginal cost = cost incurred from producing one additional unit
from the present quantity produced
Producer surplus:
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Demand and Supply: movement or shift?
Key questions: demand or produce more at the same price?
Gasoline prices “at the pump” rise
Nations open strategic reserves, send crude to U.S.
With gas higher, fewer people go to the mall to buy a shirt
Buy a machine that makes widgets twice as fast, but still sell a
widget for the same price
Buy a machine that makes widgets twice as fast, but now can
sell a widget for a higher price
New policy disallows timber harvest on public land in the PNW;
prices in the South rise
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