4.2 Supply

Law of Supply

• The     price of a good or service affects the quantity firms plan to sell. The quantity supplied of a good or     service is the amount that people are willing and able to sell during a     given time period at a specified price.

• The     law     of supplystates     that other things remaining the same, if the price of a good rises, the     quantity supplied of that good increases; and if the price of a good falls,     the quantity supplied of that good increases. The law of supply occurs     because an increase in the quantity of a good produced results in an     increase in its marginal cost. So the price must rise in order to induce     firms to increase the quantity they produce.

Supply Scheduleand Supply Curve

• The     supply is the     relationship between the quantity supplied and the price of the good when     all other influences on selling plans remain the same.

• A supply schedule is a list of the     quantities supplied at each different price when all other influences on     selling plans remain the same. The table     below gives the supply schedule for a good.

                       

Price  (dollars)	Quantity  supplied
1	10
2	20
3	30
4	40
5	50

• A     supply     curve     is a graph of the relationship between the quantity supplied of a good and     its price when all other influences on selling plans remain the same. The     figure illustrates the supply curve resulting from the supply schedule in     the table.

IndividualSupply and Market Supply

• The market supply is the sum of the supplies     of all the sellers in the market. At each price, add the quantity each seller     supplies and the sum is the market quantity supplied.

Changes inSupply

• When any factor     that influences selling plans other than the price of the good changes,     there is a change     in supply     and the supply curve shifts. An increase in supply shifts the supply curve     rightward and a decrease in supply shifts the supply curve leftward. Five     factors change supply:

·        Prices of RelatedGoods:A substitute in production is a good that canbe produced in place of another good, such as Pepsi and Mountain Dew. A complementin productionis a good that must be produced along with the initial good, such as wood andwood pulp. A fall in the price of asubstitute in production or a rise in the price of a complement in productionincreases the supply of the good.

·        Prices of Resourcesand Other Inputs:If the price of a resource used to produce the good rises, the cost ofproducing the good rises so the supply of the good decreases.

qLand Mine: Make sure to clearly distinguish between the terms wage rates andincome, as students often treat these terms as synonyms. This createstremendous confusion, as changes in income will change demand, but changes inwage rates will change supply.  Remindstudents that changes in wage rates may not always translate to predictablechanges in income.  For example, if wagerates increase, firms may want to use less labor.  So, some workers will be paid more per hour,though fewer hours are being worked – leaving the impact on total incomebrought home by workers potentially unchanged. Students need to accept that“wage rates” is just a term used for the price of an input (labor) and is notthe same as income.  This will beespecially important for students in macroeconomics, as they will encounterthis again when working with aggregate demand and aggregate supply.

·        Expected FuturePrices:Expectations about future prices affect current supply. If the price of a goodis expected to rise in the future, the current supply of the good decreases.

·        Number of Sellers: If the number ofsuppliers increases, the supply increases.

·        Productivity: Productivity isoutput per unit of input. An increase in productivity lowers costs andincreases supply. Technological advances and increased capital raiseproductivity and thereby increase the supply. Natural disasters lower productivityand thereby decrease the supply.

Change in the Quantity Supplied Versus Change in Supply

• A change in price results     in a movement along the supply curve, which is change in the quantity     supplied.     A     change in other factors shifts the supply curve, which is a change in     supply.

·        Inthe figure, the movement along supply curve S₀ from point ato point b as a result of the price rising from $2 to $4 is a change inthe quantity supplied. The shift of the supply curve from S₀ to the new supplycurve S₁ is a change in supply.