BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis Pangasinan State University Social...

BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis

Pangasinan State UniversitySocial Science Department – PSU Lingayen

Chapter 4 SUPPLY ANALYSIS2nd Sem, S.Y 2013-2014



The analysis of the supply of produced goods has two parts:

– An analysis of the supply of the factors of production to households and firms.

– An analysis of why firms transform those factors of production into usable goods and services.

Supply Analysis



Supply

Supply is the willingness and ability of producers to offer or sell good and services for sale.

Supply for a product is the amount of the good or service that producers in a market are willing and able to sell at a certain price, ceteris paribus (others variables held constant).



The Law of Supply

Law of supply – direct relationship between price and quantity supplied.

It states that producers are willing to sell more of a good or service at a higher price than they are at a lower price



Law of Supply – As the price of a product rises, producers will

be willing to supply more. – The height of the supply curve at any quantity

shows the minimum price necessary to induce producers to supply that next unit to market.

– The height of the supply curve at any quantity also shows the opportunity cost of producing the next unit of the good.

The Law of Supply



Economic Models in Supply Analysis

Supply Schedule Supply Curve Supply Function



Supply Schedule

Supply schedule a table that shows the relationship between the price

of a good and the quantity supplied. This reflects the various quantities of the product that

will be sold at various prices at a specific time and place. It can be an individual or a market supply schedule.

Market supply schedule is the sum of all the individual supply for a particular good



Individual Supply vs. Market Supply

Market supply refers to the sum of all individual supply for a particular good or service.

Graphically, individual supply curves are summed horizontally to obtain the market demand curve.



Price per kilo

ABCDE

A. Individual Supply Schedule for Tomatoes in Pangasinan

Tomatoes supplied

per month

50 40302010

500400300200100

A Sample Supply Schedule

Price per kilo

ABCDE

B. Market Supply Schedule for Tomatoes in Pangasinan

Tomatoes supplied

per month

50 40302010

10,0008,0006,0004,0002,000



Supply Curve

The supply curve is the graphical representation of the law of supply.

The supply curve slopes upward. The slope tells us that the quantity

supplied varies directly – in the same direction – with the price.



Pri

ce (

per

uni

t)

0

Quantity supplied (per unit of time)

PA

QA

A

A Sample Supply Curve

Supply Curve



Price

per

kilo

(In

peso

s)

B. Supply Curve

Quantity of Tomatoes supplied (per month)100 200 300 400 500

60

50

40

30

20

10

0

A

B

C

D

From a Supply Schedule to a Supply Curve

Supply of Tomatoes

Price per kilo

ABCDE

A. Supply Schedule for Tomatoes in Pangasinan

Tomatoes supplied per week

50 40302010

500400300200100

E



Let’s Check Your Understanding

Suppose that you want to analyze the market supply of cabbage in Baguio City. You survey all the farms that produce and sell cabbage and determine how many kilos they are willing to sell at various prices. If your survey enables you to make a market supply schedule, create a hypothetical supply schedule for cabbage. Use this market supply schedule to draw a market supply curve and derive a supply equation.



Supply Function shows the relationship between the quantity supplied and the price of the good (and other factors). In simple terms, quantity supplied is a function of price…[Qd = f (P…) ].

The supply function is given by the equation

In the given supply schedule, the

supply equation can be derived using the two-point form in finding the equation of a line. The formula is

Supply Function

Price per kilo

ABCDE

A. Supply Schedule for Tomatoes in Pangasinan

Tomatoes supplied per week

50 40302010

500400300200100



Let’s Check Your Understanding!

Price (P)

Quantity Supplied

250 20

500 50

750 70

1,000 80

1,250 90

1,500 100

From the following table of prices of branded jeans and quantity supplied (in thousands of jeans), draw the supply curve for branded jeans. Describe the curve.




The supply curve for a product is represented by the equation,, where is quantity supplied and is price.

1. What is the quantity supplied if the price is Php 500?

2. What is the price if the quantity supplied is 400 units?

3. What is the highest price to be paid for this commodity?

4. What quantity would be supplied if the product is free?

5. What is the inverse equation of the supply curve? Graph the supply curve



Supply

refers to a schedule of quantities a seller is willing to sell per unit of time at various prices, other things constant.

Quantity supplied

refers to a specific amount that will be supplied at a specific price.

Supply versus Quantity Supplied



Change in quantity supplied caused by a change in the price of a good. the movement of points within the same supply

curve.

Change in supply the changes in the quantity supplied brought about

by any of the non-price determinants of supply (input cost, technology, taxes and subsidies, etc.) and not by price (which is constant).

Change in Quantity Supplied vs. Change in Supply



A movement along a supply curve is the graphical representation of the effect of a change in price on the quantity supplied.

Movements Along a Supply Curve vs.Shifts in Supply

A shift in supply is the graphical representation of the effect of anything (factors affecting supply) other than price on supply.



Change in Quantity Supplied

S1

Change in quantity supplied(a movement along the curve)

B

0

Pri

ce (

per

uni

t)

Quantity supplied

100

50

25

200

A



S1

D1

Shift in SupplyP

rice

(per

uni

t)

Quantity Supplied

100

50

30

250

S2

S0

Increasein Supply

Decreasein Supply




Determine whether the following will have effect on the change in the quantity supplied or change in supply. Show the effect through a graph.

1. The price of notebook computers sharply falls so many manufacturers produce less.

2. New technologies have made it possible to build large cruise ships, Econ cruise lines offer more cabins, at lower prices, than before.

3. Econ Phone develops an effective wireless technology thus, it increases the supply of cell phones

4. An increase in the number of Internet service providers increases the supply of such services.

5. Coco lumber firms expect that there will be a substantial rise in future prices of coco lumbers, thus the firms decrease their supply of coco lumbers today.



Determinants of Supply

Taxes and Subsidies

Taxes and Subsidies

Input Costs

Input Costs

Number of Producers Number of Producers

Producer Expectations

Producer Expectations

Technology and Labor ProductivityTechnology and

Labor Productivity

WeatherWeather

Prices of Substitutes and Complements

Prices of Substitutes and Complements



Non-price Determinants of Supply

Supply Shifters are factors that cause shifts in the supply curve:

– Input Costs or Resource Prices– The prices of related good– Technology and Labor Productivity– Number of Sellers– Future Price Expectation– Taxes and Subsidies– Weather



Input Costs

Input costs are the price of the resources needed to produce a good or service

When costs go up, profits go down, so that the incentive to supply also goes down.

Supply will increase when the cost of inputs falls, and vice versa.



Increase in Supply

Decrease in Supply

Input Costs – Shift in the Supply Curve



Prices of Related Goods

Substitutes – are often pairs of goods that are used in place of each other in production process.

Complements - are pairs of goods that are used together in production of a good or service.



Increase in Supply

Decrease in Supply

PRR (Substitutes) – Shift in the Supply Curve



Increase in Demand

Decrease in Demand

PRR (Complements) – Shift in the Supply Curve



Technology

Involves the application of scientific methods and discoveries to the production process, resulting in new products or new manufacturing techniques.

Improvements in technology enable producers to spend less on inputs yet still produce the same output. When a better technology becomes available, reducing the cost of production, supply increases, and the supply curve shifts to the right.



Labor Productivity

It is the amount of goods and services that a person can produce in a given time.

Increasing productivity decreases the costs of production and therefore increases supply.

Better-trained and more-skilled workers can usually produce more goods in less time, and therefore at lower costs, than less-educated or less-skilled workers



Increase in Demand

Decrease in Demand

Technology– Shift in the Supply Curve



Producer Expectation

If producers expect the price of their product to rise or fall in the future, it may affect how much of that product they are willing and able to supply in the present.

For example, if a farmer expects the price of corn to be higher in the future, he may store some of the current crop, thereby decreasing supply.



Increase in Supply

Decrease in Supply

Producer Expectation – Shift in the SC



Number of Producers

An increase in the number of producers means increased competition, which may eventually drive less-efficient producers out of the market, decreasing supply.

When one company develops a successful new idea, whether it’s the latest generation of cell phones, or fast-food meal, other producers soon enter the market and increase the supply of the good or service. When this happens, the supply curve shifts to the right.



Increase in Supply

Decrease in Supply

Number of Sellers – Shift in the Supply Curve



Taxes and Subsidies

An excise tax is a tax on the production or sale of a specific good or service. Excise taxes are often placed on items such as alcohol and tobacco— things whose consumption the government is interested in discouraging.

Taxes like excise tax increase producers’ costs and, therefore, decrease the supply of goods.

Taxes tend to decrease supply; subsidies have the opposite effect. A subsidy is a government payment that partially covers the cost of an economic activity. The subsidy’s purpose is to encourage or protect that activity.

BACHELOR OF ARTS IN ECONOMICS Econ 111 – Economic Analysis Pangasinan State University Social...

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