AS Micro: Determinants of Supply

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AS Micro: Determinants of Supply

  1. 1. Determinants of Supply AS Economics
  2. 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. 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
  4. 4. The Supply Curve Price Quantity Supply P1 Q1 P2 Q2Q3 P3
  5. 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. 6. An outward shift in the Supply Curve Price Quantity S1 P1 Q1 Q2 S2
  7. 7. An inward shift in the Supply Curve Price Quantity S1 P1 Q1 Q2 S2 S3 Q3
  8. 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
  9. 9. The supply of milk
  10. 10. The milk supply chain
  11. 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. 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. 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. 14. Can ewe think of examples of joint supply?
  15. 15. Get help from fellow students, teachers and tutor2u on Twitter: #econ1 @tutor2u_econ

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