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AS Micro: Determinants of Supply

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Determinants of Supply
AS Economics
Key Issues
• The meaning of supply
• The law of supply
• The supply curve
• Incentives to produce – explaining the supply
curve
• The conditions of supply – shifts in the supply
curve
• Joint supply
The Law of Supply
• Supply is the quantity of a good or service that a
producer is willing and able to supply onto the
market at a given price in a given time period
• The basic law of supply is that as the market price
of a commodity rises, so producers expand their
supply onto the market
• A supply curve shows a relationship between
price and quantity a firm is willing and able to sell
The Supply Curve
Price
Quantity
Supply
P1
Q1
P2
Q2Q3
P3
Explaining the supply decision
• The “quantity supplied” is the amount sellers are willing
and able to offer for sale at a single price
• The change in the price of the good itself does not shift
supply--it causes a movement ALONG the supply curve
• Supply curves normally slope upward. Why?
– Rising prices act as an incentive for producers to expand output
– the potential for higher profits is the incentive!
– Increased output may lead to higher costs of production
• But not all economists accept this convention
– Increased output might lead to lower costs per unit (this is
known as economies of scale)
An outward shift in the Supply Curve
Price
Quantity
S1
P1
Q1 Q2
S2
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AS Micro: Determinants of Supply

  • 2. Key Issues • The meaning of supply • The law of supply • The supply curve • Incentives to produce – explaining the supply curve • The conditions of supply – shifts in the supply curve • Joint supply
  • 3. The Law of Supply • Supply is the quantity of a good or service that a producer is willing and able to supply onto the market at a given price in a given time period • The basic law of supply is that as the market price of a commodity rises, so producers expand their supply onto the market • A supply curve shows a relationship between price and quantity a firm is willing and able to sell
  • 5. Explaining the supply decision • The “quantity supplied” is the amount sellers are willing and able to offer for sale at a single price • The change in the price of the good itself does not shift supply--it causes a movement ALONG the supply curve • Supply curves normally slope upward. Why? – Rising prices act as an incentive for producers to expand output – the potential for higher profits is the incentive! – Increased output may lead to higher costs of production • But not all economists accept this convention – Increased output might lead to lower costs per unit (this is known as economies of scale)
  • 6. An outward shift in the Supply Curve Price Quantity S1 P1 Q1 Q2 S2
  • 7. An inward shift in the Supply Curve Price Quantity S1 P1 Q1 Q2 S2 S3 Q3
  • 8. Causes of shifts in market supply • Changes in production costs – Wage costs – Raw materials and components – Energy costs • Government taxes and subsidies • Climatic conditions (important for agricultural supply) • Changes in production technologies • Changes in the number of producers in the market • Changes in the objectives of suppliers in the market • Changes in the prices of substitutes in production
  • 11. Factors affecting the market supply of milk • The price of raw milk from farmers • Productivity in milk industry • The number of suppliers in the industry • Costs of packaging and transportation • Government subsidies to milk producers
  • 12. Joint Supply • Two products are in joint supply when a rise in the output of one product leads to a rise in the supply of the other product
  • 13. Diagram to show joint supply Price Price Quantity bought and sold Quantity bought and sold D S Beef P1 Q1 D S Beef hide D1 P2 P3 Qa S1 Qc P4 QbQ2 Two products are in joint supply when a rise in the output of one product leads to a rise in the supply of the other product
  • 14. Can ewe think of examples of joint supply?
  • 15. Get help from fellow students, teachers and tutor2u on Twitter: #econ1 @tutor2u_econ