Microeconomics - International Supply Theory

1. MICROECONOMICS
CHAPTER 3:
SUPPLY THEORY

2.  At the end of the lesson, students should be able to:
 Understand the law of demand
 Explain the determinants of supply.
 Draw the demand curve

3. 3.0 SUPPLY
 Firms build the factories, hire workers, and buy the
materials because they believe it will be profitable
to do so.
 Supply decision thus depend on the profit
potential.
 Quantity supplied of any good is the amount that
sellers are willing to sell in the market

4. 3.1 DETERMINANTS OF
SUPPLY
Price
Resources prices
Technology
Expectations
Number of sellers (Market supply curve)
Price of related goods
Tax and subsidies

5. 3.2 THE LAW OF SUPPLY
 There is a direct relationship between price
and quantity supplied.
 Quantity supplied rises as price rises, other things
constant.
 Quantity supplied falls as price falls, other things
constant.
 Quantity supplied is positively related to the price of
the good

6. 3.3 THE SUPPLY CURVE
 The supply curve is the graphic representation
of the law of supply.
 The supply curve slopes upward to the right.
 The slope tells us that the quantity supplied
varies directly – in the same direction – with
the price.

7. S
A
Quantity supplied (per unit of time)
0
Price
(per
unit)
PA
QA
A Sample Supply Curve

8. Supply Curve DVDs

9. Change in quantity
supplied (a movement
along the curve)
Change in Quantity Supplied
Price
(per
unit)
Quantity supplied (per unit of time)
S0
$15
A
1,250 1,500
B

10. Shift in Supply
Price
(per
unit)
Quantity supplied (per unit of time)
S0
Shift in Supply
(a shift of the curve)
S1
$15
A B
1,250 1,500

11. From Individual Supplies to a Market
Supply
Quantities
Supplied
A
B
C
D
E
F
G
H
I
(1)
Price
(per DVD)
(2)
Ann's
Supply
(5)
Market
Supply
(4)
Charlie's
Supply
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
0
1
2
3
4
5
6
7
8
0
0
1
2
3
4
5
5
5
0
0
0
0
0
0
0
2
2
0
1
3
5
7
9
11
14
15
(3)
Barry's
Supply

12. Decrease in Supply

13. Increase in Supply

14. Another examples :
 The supply curve can shift position
 If the supply curve shifts to the right, this is
an increase in supply; more is provided for
sale at each price
 If the supply curve moves inwards, there is
a decrease in supply meaning that less will
be supplied at each price

17. Determinant of shift in market
supply
1.Changes in the costs of production
Lower costs of production mean that a business can
supply more at each price.
2.Changes in technology
Production technologies can change quickly and in
industries where change is rapid we see increases in
supply and lower prices for the consumer.
3.Government taxes and subsidies and regulations
indirect taxes cause an increase in production costs - an
inward shift of supply
Subsidies bring about a fall in supply costs – an outward
shift of supply

18. 4.Changes in climate in agricultural industries
A substitute in production is a product that
could have been supplied using the same
resources.
If cocoa prices rise for example this may cause
some farmers to switch from other crops and
invest money in establishing new cocoa
plantations.
5.Change in the prices of a substitute in
production
When new businesses enter a market, supply

19. THE END