Determinants of Supply

1
Determinants of Supply

• Aims
• The nature of supply
• The relationship between price and supply
• Market supply
• Causes of shifts in the supply curve

2
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

3
The Supply Curve
An increase in price will cause an EXPANSION in
Supply.
A fall in price will cause a CONTRACTION in
Supply.
4
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 causes
  a movement ALONG the supply curve
• Supply curves normally slope upward. Why?
• Rising prices act as an incentive for producers
  to expand output potential for higher profits
• Increased output may lead to higher costs of
  production
• But not all economists accept this convention (A2
  theory)
• Increased output might lead to lower costs per
  unit (known as economies of scale)

5
An outward shift in the Supply Curve
Price
S1
S2
P1
Q2
Q1
Quantity
6
An inward shift in the Supply Curve
Price
S3
S1
S2
P1
Q2
Q3
Q1
Quantity
7
Causes of shifts in market supply

• Changes in production costs
• Wages,raw materials and components, energy,
  rents, interest rates
• Government taxes and subsidies
• Changes in technology ICT can reduce long term
  costs but are expensive in SR
• Climatic conditions (important for agricultural
  supply)
• 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
• The profitability of alternative products
  (substitutes) or those with joint supply (crude
  oil petrol and paraffin and diesel)
• Expectation of future price changes

8
Shifts in the Supply curve

• What would cause the supply of butter to rise?
• Reduction in costs of producing e.g. nitrogen
  fertiliser more used by farmers better grass
  more milk
• Better technology in producing butter
• More govt subsidies to farmers
• Increase in profitability of skimmed milk ..
  Because butter and cream products are jointly
  produced with skimmed milk.
• Weather conditions favourable for favourable
  grass yield.

Pause for mini exercise cut out strips for you
to select!
9
More examples of shifts in supply Mini exercise
1

• What reasons might be given for the supply of
  potatoes to fall?
• For what reasons might the supply of leather
  rise?
• What reasons might be given for the supply of cod
  to fall?
• For what reasons might the number of plumbers
  grow?
• What reasons might be given for the number of
  teachers to fall?
• What reasons might there be for the number of new
  houses being built rise?

10
The Supply Curve
Price
The supply curve shows the quantity of a product
that a supplier is willing and able to sell at a
given price in a given time period There is
usually a positive relationship between price and
quantity supplied
Supply (S)
P1
Quantity Supplied (Qs)
11
The Supply Curve
Price
An increase in market price causes an expansion
of quantity supplied as producers respond to the
incentive of higher prices and higher potential
profits.
An expansion of supply
S1
P2
P1
Quantity Supplied (Qs)
12
The Supply Curve
Price
A lower market price will lead to a contraction
in total output
S1
P1
P2
A contraction of supply
Quantity Supplied (Qs)
13
An Outward Shift in the Supply Curve
Price
Shifts in the supply curve mean that more or less
will be supplied onto the market at each price
level
S1
S2
P1
Quantity Supplied (Qs)
14
An Inward Shift in the Supply Curve
Price
A fall in supply means that less is supplied onto
the market at each price
S3
S1
P1
Quantity Supplied (Qs)
15
Your Go
So get your whiteboards ready. Write on one
side MOVEMENT ALONG On the other SHIFT

• Remember that PRICE contraction or expansion
• All other factors SHIFT inwards or outwards

16
Mini exercise 2.

• In each case BE PREPARED TO EXPLAIN
• Whether THE move along the supply curve is a
  contraction or expansion
• Or whether THE shift in the supply curve is to
  the left or right

• New oil fields starts up in production
• The demand for central heating rises
• The price of gas falls
• Oil companies anticipate a surge in demand for
  central heating oil
• The demand for petrol rises
• New technology decreases the cost of oil refining
• All oil products become more expensive.

17
Supply images

• . The milk market!

18
The supply of milk
19
The milk supply chain
20
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

21
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

Can ewe think of examples of joint supply?
22
Diagram to show 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
S Beef
Price
Price
S Beef hide
P2
S1
P3
P1
P4
D1
D
D
Q1
Q2
Qa
Qc
Qb
Quantity bought and sold
Quantity bought and sold
23
Homework

• Worksheet
• D\How the market works\Worksheets\4. Shifts in
  supply.doc