theory of supply econs

• Key elements of the Theory of Supply

  • Law of Supply
  • Factors / Determinants affecting Supply
  • Change in quantity supplied and a change in supply

  
• Supply


  The quantity of a good or service that producers are willing & able to sell at various prices, over a particular period of time, ceteris paribus
• Law of Supply


  • The higher the price, the larger the quantity supplied
  • The supply curve is upward sloping
  • There is a Positive relationship between the price and quantity supplied

  
• Price


  Quantity supplied
• At higher output levels, the marginal cost of producing a good increases
• Marginal cost


  Additional cost incurred for producing an additional unit of output
• As the price of the good increases, profits that can be earned from producing the good increases, assuming ceteris paribus condition, more profitable and more incentive for producer to produce more of the good
• Profits


  Total revenue (TR) - Total cost (TC)
• Total revenue (TR)


  Price x Quantity

  
• Ways to express the Law of Supply

  • Supply schedule
  • Supply curve
• Individual supply

  The supply of a single firm/producer for a particular good or service
• Market supply

  The supply of ALL firms/producers in THE MARKET
• Market supply is the sum of the quantity supplied by each individual firm/producer at each price
• Factors / Determinants of Supply

  • Price Factor
  • Non-price Factors

  
• Increase in price of the good


  Increase in the quantity supplied of the good
• Decrease in price of the good


  Decrease in the quantity supplied of the good
• Non-price Factors


  • Weather
  • Expectation of future price level
  • Technological changes
  • Price of related goods
  • Input costs
  • Government policies
  • Number of Sellers

  
• WETPIGS


  Mnemonic for Non-Price Determinants of Supply
• Weather


  The supply of some goods can be affected by weather
• Fall in supply due to weather


  Supply curve shifts leftward
• Expectation of future prices

  If price of a good is expected to increase in the future, producers may temporarily reduce the amount they sell now and build up stocks to sell the good at higher prices later
• Fall in supply due to expectation of future price increase


  Supply curve shifts leftward
• Technological changes


  Producers can produce more goods per unit of FOP or use less FOP to produce same amount of goods, lowering unit cost of production and increasing profits
• Technological improvement


  Rise in supply
• Technological advancement


  Shift of supply curve rightward in many industries
• Joint supply


  Goods produced in association with each other, where one is a by-product of the other
• Competitive supply


  Goods that are alternative products that a firm could produce with its factors of production
• Increase in price of a good in joint supply


  Increase in quantity supplied of that good and the by-product good
• Increase in price of a good in competitive supply


  • Increase in quantity supplied of that good
  • Decrease in supply of the alternative good
• Factors affecting cost of production

  • Increase in cost of factors of production
  • Increase in worker productivity
  • Increase in state of technology
• Increase in cost of factors of production

  • Increase in cost of production
  • Decrease in supply
• Increase in worker productivity or technology

  • Decrease in unit cost of production
  • Increase in supply
• Indirect taxes


  Taxes on goods and services that increase the cost of production and decrease supply
• Subsidies


  Payments made to firms by government to help reduce the cost of production, increasing profitability and supply
• Subsidies

  Increase in supply, supply curve shifts rightward
• Number of sellers


  Affects the market supply, with more sellers increasing supply and fewer sellers decreasing supply
• New firms entering profitable industries

  Increase in market supply, supply curve shifts rightward
• Existing firms exiting declining industries

  Decrease in market supply, supply curve shifts leftward