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Supply Micro Economics ECO101

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ECO-101 Micro Economic Lecture 3

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Supply Micro Economics ECO101

  1. 1. SUPPLY Micro Lecture 3
  2. 2. Answer please!!!  Explain law of demand.  Differentiate dependent & independent variables.  Why does demand curve slope downward?  What are the determinants of demand?  What happens to the demand curve when any of these determinants change? Explain by making curves.  Distinguish between change in demand and change in quantity demand explain through diagrams.  Show extension & contraction of demand on curve.
  3. 3. Objectives By the end of the lecture students will be able to  Define supply, law of supply  Draw supply curve  Make their own product’s supply curve  Explain movement along supply curve & shift in supply curve  Enlist market determinants of supply & show their effects on the supply curve
  4. 4. Supply Quantity supplied is the amount of a good that sellers are willing and able to sell.
  5. 5. Supply Curve $3.00 2.50 2.00 1.50 1.00 0.50 21 3 4 5 6 7 8 9 10 1211 Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0
  6. 6. Law of Supply The law of supply states that (Ceteris paribus) other things remaining constant there is a direct (positive) relationship between price and quantity supplied.
  7. 7. Change in Quantity Supplied 1 5 Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 S 1.00 A C $3.00
  8. 8. Price and Quantity Supplied: The Law of Supply8 of 48 • A supply curve is a graph illustrating how much of a product a firm will supply per period of time at different prices. 0 1 2 3 4 5 6 0 10 20 30 40 50 Thousands of bushels of soybeans produced per year Priceofsoybeansperbushel($) PRICE (PER BUSHEL) QUANTITY SUPPLIED (THOUSANDS OF BUSHELS PER YEAR) $ 2 0 1.75 10 2.25 20 3.00 30 4.00 45 5.00 45 CLARENCE BROWN'S SUPPLY SCHEDULE FOR SOYBEANS
  9. 9. Activity  Make your Market Supply Curve.
  10. 10. Market Supply Market supply refers to the sum of all individual supplies for all sellers of a particular good or service. Graphically, individual supply curves are summed horizontally to obtain the market supply curve.
  11. 11. From Individual Supply to Market Supply  The supply of a good or service can be defined for an individual firm, or for a group of firms that make up a market or an industry.  Market supply is the sum of all the quantities of a good or service supplied per period by all the firms selling in the market for that good or service.
  12. 12. From Individual Supply to Market Supply  As with market demand, market supply is the horizontal summation of individual firms’ supply curves.
  13. 13. Activity  Make market supply curve.
  14. 14. Determinants of Supply 1. Market price 2. Input prices 3. Technology 4. Expectations 5. Number of producers 6. What are some examples?
  15. 15. Change in Supply Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 S1 S2 S3 Increase in Supply Decrease in Supply
  16. 16. 1.Resource Cost [wages & raw materials] [Inverse] Wages Raw Materials S If resource cost decreases supply Increases [making more $] If resource cost increases supply Decreases [making less $]S S P
  17. 17. P1 P1 QS1 “Substitutes in production”I only have 200 acres S S1 P S2 QS1 S1 P S2 S Producers want to produce more of the good where price is increasing, or at least, where the price is not going down. P2 QS2 P2 QS2
  18. 18. S Because cows produce more milk, farmers don’t have to have as many cows.[saves $] S P Supply curve moves “udderly” to the right. Less skin abrasions so happier cows produce more milk. Mooooove over and give me that waterbed.
  19. 19. S3 [Inverse] P If business have their taxes decreased, it moves the supply curve to the right. S1 S2 If business have their taxes increased, it moves the supply curve to the left. I’m losing profits.”
  20. 20. Shift of Supply Versus Movement Along a Supply Curve 20 of 48 • A higher price causes higher quantity supplied, and a move along the demand curve. • A change in determinants of supply other than price causes an increase in supply, or a shift of the entire supply curve, from SA to SB.
  21. 21. • In this example, since the factor affecting supply is not the price of soybeans but a technological change in soybean production, there is a shift of the supply curve rather than a movement along the supply curve. • The technological advance means that more output can be supplied for at any given price level. Shift of Supply Curve for Soybeans Following Development of a New Seed Strain
  22. 22. To summarize: Change in price of a good or service leads to Change in quantity supplied (Movement along the curve). Change in costs, input prices, technology, or prices of related goods and services leads to Change in supply (Shift of curve). Shift of Supply Versus Movement Along a Supply Curve
  23. 23. Increases in Demand and Supply  Higher demand leads to higher equilibrium price and higher equilibrium quantity.  Higher supply leads to lower equilibrium price and higher equilibrium quantity.
  24. 24. Decreases in Demand and Supply  Lower demand leads to lower price and lower quantity exchanged.  Lower supply leads to higher price and lower quantity exchanged.
  25. 25. Relative Magnitudes of Change • The relative magnitudes of change in supply and demand determine the outcome of market equilibrium.
  26. 26. Relative Magnitudes of Change • When supply and demand both increase, quantity will increase, but price may go up or down.

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