SUPPLY

Chapter 8
Learning Objectives
• To define supply
• To distinguish between extensions and contractions in supply
• To recognise the link between individual and market supply in terms
of aggregation
• To analyse the causes of shift s in the supply curve
Introducing the topic
• Have you seen a typewriter? In the past, there were many firms
producing typewriters. Now there are very few typewriters produced.
In contrast, the number of coffee shops is increasing and more and
more trainers are being sold. Why does the supply of products
change?
Starter
• Are you prepared to offer your
services (e.g. to wash teachers’ cars) at
different prices.
1. Start with a low price (e.g. zero)
2. Slowly raise the price,
3. counting how many of them are
prepared to offer their services at
different prices.
4. Keep raising the price until they have
all have offered their services.
 Supply is the willingness and ability to sell a
product. It is important not to confuse supply
with production.
Supply is influenced by the amount produced
Definitio but is not the same as production.

n of This is because some of the amount produced

Supply today may be stored, in order to be sold at a
later date.
Conversely, it is possible that some of the
output offered for sale today may have come
from stocks.
 Supply and
price
• Supply is directly related to
price.
• A rise in price will lead to a
rise in supply.
• Firms will be more willing to
supply the product, as they
are likely to earn higher
profits.
• They will also be able to
supply more as the higher
price will make it easier for
them to cover the costs of
production.
Individual and market supply
• Individual supply is the supply of one plant/firm, whereas market
supply is the total supply of a product supplied by all the firms in the
industry.
• Market supply is calculated in a similar way to market demand.
• The quantities that would be supplied by each firm at each price are
added up.
• So aggregation of the supply of each individual firm gives the market
supply.
Market Supply
 A supply schedule
• A supply schedule records the different quantities supplied at different prices. Table
8.1 shows a supply schedule for train tickets from Station X to Station Y.
Supply Curve
• As with demand curves, supply curves can be drawn as straight lines.
The effect of a change in price on
supply
• Again, as with demand, a change in price of the product will cause a
contraction in supply (a decrease in the quantity supplied).
• This time, however, it is a rise in price which will cause an extension in
supply and a fall in price which will cause a contraction in supply.
Extension in Supply
• A change in price of the product
will cause an extension in supply
(expansion or an increase in the
quantity supplied)
• But, it is a rise in price which will
cause an extension in supply
Contraction In Supply
• As with demand, a change in
price of the product will cause a
contraction in supply (a decrease
in the quantity supplied).
• But, it is a fall in price which will
cause a contraction in supply.
Conditions of supply
Conditions of supply
• A change in supply occurs when the conditions facing suppliers alter.
• In such a situation, a different quantity will be offered for sale at each
price.
• For instance, a good period of weather may increase the rice crop in
a country.
• This will make it possible for rice farmers to supply more.
• Table 8.2 shows the original supply schedule in the previous season
and the supply schedule in the current season.
Shifts in the
supply curve
• a change in supply
conditions causes the
supply curve to shift.
• An increase in supply is
illustrated by a shift to
the right as shown in
Figure 8.3.
• At each and every
price, more is supplied
 Shifts in the
supply curve
• a change in supply conditions
causes the supply curve to
shift.
• a decrease in supply results in
a movement of the supply
curve to the left
• Now whatever the price, less
will be supplied.
Causes of changes in supply
1. changes in the costs of production,
2. improvements in technology,
3. taxes,
4. subsidies,
5. weather conditions,
6. health of livestock and
7. crops.
8. It is also affected by the price of other products.
9. Disasters, wars, discoveries of new sources and depletion, also contribute
to this change of commodities.
1. Changes in the costs of
production
• If it costs more to produce a product, suppliers will want a higher
price for it.
• For example, if it costs $200 to produce four units, firms would supply
four units at a price of $50 per unit.
• If costs rise to $280, they would be prepared to sell only four units, at
a price of $70 each.
• The two basic reasons for a change in costs of production are:
1. a change in the price of any of the factors of production
2. a change in their productivity.
• If, for example, the price of raw materials used increases, it will be
more expensive to produce a product.
• One cost which changes frequently is the cost of transporting goods.
• This is because the price of oil used in petrol, is itself very volatile.
• A rise in the productivity of a factor of production will reduce unit
cost.
• For example, if a worker who is paid $200 a week produces 100 units,
the labour cost per unit is $2.
• If the worker’s productivity rises to 200, the labour cost per unit
would fall to $1.
• An increase in the wages paid to workers by itself would raise the
costs of production and, therefore, cause a decrease in supply.
• However, if the increase in wages is accompanied by an equal rise in
productivity, then unit costs and supply will remain unchanged.
Improvements in technology
• This influence is closely related to the previous one, since
improvements in technology raise the productivity of capital, reduce
costs of production and result in an increase in supply.
• It has become much cheaper to produce a range of products due to
the availability of more efficient capital goods and methods of
production.
• For example, whilst world demand for personal computers has
increased in recent years, the supply has increased even more as it
has become easier and cheaper to produce them.
Taxes
• Direct taxes on firms, including corporation tax, and indirect taxes,
such as VAT and excise duty, are effectively a cost that firms have to
pay.
• They are likely to try to recover at least some of this extra cost by
raising the price paid by the consumers.
• Nevertheless, the firms themselves are largely responsible for passing
on the revenue from the tax to the government.
• A rise in the rate of an existing tax or the imposition of a new tax, will
make it more expensive to supply a product and hence will reduce
supply.
• In contrast, a cut in a tax or its removal will increase supply.
Subsidies
• A subsidy given to the producers provides a financial incentive for them to
supply more.
• Besides being paid by the consumer, they are now being paid by the
government also.
• As a result, the granting of a subsidy will cause an increase in supply whilst the
removal of a subsidy will cause a decrease in supply.
• Most countries, throughout the world, subsidise some agricultural products.
• A number of them also give subsidies to new and important industries. Less
frequently, a government may also give a subsidy to consumers, to encourage
them to buy a particular product.
• For example, grants may be given to households to enable them to buy houses.
In this case, of course, it is demand and not supply conditions which change.
Weather conditions and health of
livestock and crops
• Changes in weather conditions affect particular agricultural products.
A period of good weather around harvest time is likely to increase the
supply of a number of crops.
• Very dry, very wet or very windy weather, however, is likely to damage
a range of crops and thereby reduce their supply.
• The amount of agricultural products produced and available for
supply is also influenced by the health of livestock and crops.
• The outbreak of a disease, such as foot and mouth in cattle or blight
in crops, will reduce supply.
Prices of other products
• Firms often produce a range of products. If one product becomes
more popular, its price will rise and supply will extend.
• In order to produce more of this product, the firm may divert the
resources from the production of other products.
• The prices of these other products have not changed but the firm will
now supply less at each and every price.
• For example, if a farmer keeps cattle and sheep, a rise in the price and
profitability of lamb is likely to result in the farmer keeping fewer
cows and a corresponding decrease in the supply of beef.
Prices of other products
• Besides the products being supplied in a competitive environment,
they can also be jointly supplied.
• This means that one product is automatically made when another
product is produced, that is one product is a by-product of the other
one.
• For example, when more beef is produced, more hides will be
available to be turned into leather.
• In the case of products which are jointly supplied, a rise in the price of
one product will cause an extension in supply of the other product.
• Firms make more of one product because its price has risen.
• The supply of the other product will increase automatically.
• More is produced, not because it has risen in price but because the
price of a related product has risen.
Disasters and wars
• Natural disasters, such as hurricanes, floods and wars, can result in a
significant decrease in supply.
• The earthquake and resulting tsunami that hit Japan in March 2011
caused extensive damage to infrastructure and killed workers.
• These effects reduced the supply of a range of products.
Discoveries and depletions of
commodities
• The supply of some commodities, such as coal, gold and oil, is
affected by discoveries of new sources.
• For example, the discovery of new oilfields will increase the supply of
oil.
• In contrast, if coal is used up in some mines, the supply of coal will be
reduced in the future.