MODEL OF SUPPLY
The model of supply is an attempt to explain the
amount supplied of any good or service.
SUPPLY DEFINED
The amount of a good or service a firm wants to
sell, and is able to sell per unit time.
Supply
slide 1
THE “STANDARD” MODEL OF
SUPPLY
The DEPENDENT variable is the amount
supplied.
The INDEPENDENT variables are:
the good’s own price
the prices of inputs used in its production
the technology of production
taxes and subsidies
Supply
slide 2
YOU COULD WRITE THE MODEL
THIS WAY:
The supply function for tacos
QS(tacos) = S(Ptacos, Ptaco shells, Plettuce, Plabor,
Ptomatoes, . . . ,technology, taxes &
subsidies)
Supply
slide 3
THE SUPPLY CURVE
The supply curve for any good shows the
quantity supplied at each price, holding
constant all other determinants of supply.
The DEPENDENT variable is the quantity supplied.
The INDEPENDENT variable is the good’s own
price.
Supply
slide 4
THE LAW OF SUPPLY
The Law of Supply says that an increase in a
good’s own price will result in an increase in
the amount supplied, holding constant all the
other determinants of supply.
The Law of Supply says that supply curves are
positively sloped.
Supply
slide 5
A SUPPLY CURVE
A supply curve must look like this, i.e., be positively
sloped.
supply
own
price
quantity supplied
TACO MARKET
Supply
slide 6
The supply curve means:
You pick a price, such a p0, and the supply curve shows
how much is supplied.
own
price
supply
p0
Q0
Supply
TACO MARKET
quantity supplied
slide 7
If the price of tacos rises, how is
the supply curve affected?
own
price
supply
p0
quantity supplied
Q0
TACO MARKET
Supply
Go to hidden slide
slide 8
AN IMPORTANT POINT
When drawing a supply curve notice that the
axes are reversed from the usual convention of
putting the dependent (y) variable on the
vertical axis, and the independent (x) variable
on the horizontal axis.
Supply
slide 10
ECONOMISTS HAVE
HYPOTHESES ABOUT HOW
CHANGES IN EACH OF THE
INDEPENDENT VARIABLES
AFFECTS THE AMOUNT
SUPPLIED
Supply
slide 11
Other factors affecting supply
The question here is how to show the effects of
changes in input prices, technology, and taxes.
The answer, of course, is that changes in input
prices, technology, or taxes cause the supply
curve to shift.
Supply
slide 12
Changes in input prices
Consider the supply of beer, and suppose the price of
hops, a crucial input to beer, falls. Beer firms now
find that beer production is more profitable than it
was before, and they respond to this be increasing
the supply of beer.
Supply
slide 13
The price of hops falls from
$300 per ton to $100 per ton.
own price
supply @ hops price
of $300/ton
How will this affect the
supply curve for beer?
quantity
BEER MARKET
Supply
Go to hidden slide
slide 14
Change in technology
An improvement in technology makes it
possible to produce a level of output with
fewer inputs than before.
Because this lowers the cost of production,
profits rise, and firms will try to supply
more.
Supply
slide 16
Suppose beer technology improves.
own price
supply @ old
technology
How does this affect
the supply curve for beer?
quantity
BEER MARKET
Supply
Go to hidden slide
slide 17
How would you suspect an excise tax affects
the supply of a good?
price
S (no tax)
Q
Supply
Go to hidden slide
slide 19
Supply summary
Supply is a function of own price, input prices,
and technology.
The supply curve shows supply as a function of
own price, all else constant.
Changes in a good’s own price show up as
movements along a supply curve.
Changes in input prices, technology, or taxes
show up as shifts in the supply curve.
Supply
slide 21