Markets and Supply
Overheads
Competitive agents
A buyer or seller (agent) is said to be
competitive if the agent assumes or believes
that the market price is given
and that the agent's actions
do not influence the market price.
We call such an agent a price taker.
Supply for a competitive agent
The total amount of a good that a competitive agent
would choose to produce and sell at a given price
is called the quantity supplied by that agent.
The market supply of a good is the total amount
that all sellers in a market
would choose to produce and sell at a given price.
The Supply Function
The supply function for a good is a rule
that specifies the quantity of the good
that will be produced and sold at a given price
holding all other factors that affect
the quantity supplied of the good constant.
The Supply Function
S  h(P, ZS )
S = quantity supplied
P = price of the good
ZS = other factors that affect supply
ZS = (z1, z2, z3, . . . , zv)
The Law of Supply
The law of supply states that when
the price of a good rises,
and everything else remains the same,
the quantity of the good supplied will rise.
The Supply Schedule
The supply schedule is a list showing
the quantities of a good that firms will choose
to produce and sell at different prices,
with all other variables held constant
Supply of Hamburger
Price (per lb) Quantity supplied
0
0.3
0.60
0.90
1.20
1.50
1.80
2.10
2.40
2.50
3.00
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
The Supply Curve
The supply curve is a graphical depiction
of a supply schedule;
a line showing the quantity of a good or
service supplied at various prices,
with all other variables held constant.
Price
Supply of Hamburger Patties
3.5
3
2.5
2
1.5
1
0.5
0
S0
0
2000
4000
6000
8000 10000 12000
Quantity
The Law of Supply
The law of supply says that the
supply curve has a positive slope
(slopes upward)
Other factors in the supply function
Prices of inputs used to produce the good
Prices of alternative goods the firm could produce
The technology used in production
Productive capacity of the industry
Expectations about the future price of the good
Supply depends on many things
S  h(P, ZS )
S = g (P, input prices, other output prices,
technology, capacity, expectations )
Changes in Supply
A change in supply is a change
in the entire relationship between price
and quantity supplied.
An increase in supply means that sellers would choose
to produce and sell more at any price.
A decrease in supply means that they would choose
to supply less at any price.
Example change in supply
Prices of cattle rise
Price (per lb)
.30
.60
.90
1.20
1.50
1.80
2.10
2.40
2.70
3.00
Quantity
Supplied
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
New Quantity
Supplied
600
1200
1800
2400
3000
3600
4200
4800
5400
6000
Price
Changes in supply are represented by a shift
in the supply curve.
Supply of Hamburger Patties
After Rise in Cattle Prices
6
5
4
S0
S1
3
2
6,666.66
1
0
0
4000
5000
10000
Quantity
15000
Changes in supply are represented by a
shift in the supply curve.
When supply increases,
the supply curve shifts to the right;
when supply decreases,
the supply curve shifts to the left.
Changes in supply are represented by a shift
in the supply curve.
Price
Supply of Hamburger Patties
6
S2 - Decrease
5
4
S0
S1 - Increase
3
2
1
0
0
5000
10000
Quantity
15000
Changes in supply as compared to
changes in the quantity supplied
Along a fixed supply curve, as price changes
the quantity supplied will change.
This is called a
change in the quantity supplied
in contrast to a change in supply
that shifts the whole curve.
Changes in supply
and changes in the quantity supplied
Price
Supply of Hamburger Patties
6
5
S0
Original Supply
4
3
2
Change in supply
1
0
0
5000
10000
Quantity
15000
Factors causing changes in supply
Prices of inputs used to produce the good
Prices of alternative goods the firm could produce
The technology used in production
Productive capacity of the industry
Expectations about the future price of the good
Effect of input prices on supply
A rise in the price of an input causes
a decrease in supply,
shifting the supply curve to the left.
Effect of other output prices on supply
An alternative good is another good that the firm
could produce using some of the same type
of inputs as the good in question.
A rise in the price of an alternative product will
decrease the supply of the good,
shifting the supply curve to the left.
Effect of productive capacity on supply
An increase in the number of firms
in an industry will increase supply,
shifting the supply curve to the right.
An increase in the size of each firm
in an industry will increase supply,
shifting the supply curve to the right.
Effect of technology on supply
Technological advance will
increase the supply of the good,
shifting the supply curve to the right.
Expectations and Supply
If firms anticipate the price of a product
will rise in the near future,
they may choose
to sell less of the product now,
thus decreasing the supply.
If firms anticipate the price of a product
will fall in the near future, they may choose
to supply more of the product now.