Supply Individuals control the factors ofproduction – inputs, or resources,necessary to produce goods. Individuals supply factors of production tointermediaries or firms.
Supply The analysis of the supply of producedgoods has two parts:– An analysis of the supply of the factors ofproduction to households and firms.– An analysis of why firms transform thosefactors of production into usable goods andservices.
The Law of Supply There is a direct relationship betweenprice and quantity supplied. Quantity supplied rises as price rises, otherthings constant. Quantity supplied falls as price falls, otherthings constant.
Law of SupplyLaw of Supply As the price of a product rises, producers will bewilling to supply more. The height of the supply curve at any quantityshows the minimum price necessary to induceproducers to supply that next unit to market. The height of the supply curve at any quantityalso shows the opportunity cost of producing thenext unit of the good.
The Law of Supply The law of supply is accounted for by twofactors:– When prices rise, firms substituteproduction of one good for another.– Assuming firms’ costs are constant, ahigher price means higher profits.
SAQuantity supplied (per unit of time)0Price(perunit)PAQAA Sample Supply Curve
Change in quantitysupplied (a movementalong the curve)Change in Quantity SuppliedPrice(perunit)Quantity supplied (per unit of time)S0$15A1,250 1,500B
Shift in SupplyPrice(perunit)Quantity supplied (per unit of time)S0Shift in Supply(a shift of the curve)S1$15A B1,250 1,500
Shift Factors of Supply Other factors besides price affect howmuch will be supplied: Prices of inputs used in the production of agood. Technology. Suppliers’ expectations. Taxes and subsidies.