Supply: Change in Quantity Supplied - A Movement Along A Given Supply Curve That Occurs When The

SUPPLY

Law of Supply: As the price of a good rises (falls) and other things remain constant, the
quantity supplied of the good rises (falls). Producers are willing to produce more output
when the price is high than when it is low.

Quantity supplied (Qs) - amount of a good or service offered for sale in a market during a given
period of time.

In general, economists assume that the quantity of a good offered for sale depends on six major
variables:
1. The price of the good itself (P)
2. The prices of the inputs used to produce the good (PI)
3. The prices of goods related in production (Pr)
4. The level of available technology (T)
5. The expectations of the producers concerning the future price of the good (Pe)
6. The number of firms or the amount of productive capacity in the industry (F)
Direct Supply Function
Qs = f (P)
A direct supply function (also called simply “supply”) shows the relation between Qs and P
holding the determinants of supply constant.
Supply curve - a graph showing the relation between quantity supplied and price, when all other
variables influencing quantity supplied are held constant.
Change in quantity supplied - a movement along a given supply curve that occurs when the
price of a good changes, all else constant.
Supply function: Qs = -400 + 20P
Supply Curve
General Supply Function
Qs = f (P, PI, Pr, T, Pe, F )

The general supply function shows how all six of these variables jointly determine the quantity
supplied.
Supply shifters - variables that affect the position of the supply curve.
Change in Supply - Changes in variables other than the price of a good, such as input prices or
technological advances, lead to a change in supply. This corresponds to a shift of the entire
supply curve.
Prices of Inputs used in Production

As the price of an input rises, producers are willing to produce less output at each given price.
This decrease in supply is depicted as a leftward shift in the supply curve. While a decrease in
the price of an input causes an increase in production.
An increase in the price of one or more of the inputs used to produce the product will obviously
increase the cost of production. If the cost rises, the good becomes less profitable and producers
will want to supply a smaller quantity at each price. Conversely, a decrease in the price of one or
more of the inputs used to produce the product will decrease the cost of production. When cost
falls, the good becomes more profitable and producers will want to supply a larger amount at
each price.
Price of Goods Related in Production

Changes in the prices of goods that are related in production may affect producers in either one
of two ways, depending on whether the goods are substitutes or complements in production.
Substitutes in Production - goods for which an increase in the price of one good relative to the
price of another good causes producers to increase production of the now higher priced good and
decrease production of the other good.
Ex. If the price of corn increases while the price of wheat remains the same, some
farmers may change from growing wheat to growing corn, and less wheat will be supplied.
Complements in Production - goods for which an increase in the price of one good, relative to
the price of another good, causes producers to increase production of both goods.
Ex. Crude oil and natural gas often occur in the same oil field, making natural gas a by-
product of producing crude oil, or vice versa. If the price of crude oil rises, petroleum firms
produce more oil, so the output of natural gas also increases.
Other examples of complements in production include nickel and copper (which occur in
the same deposit), beef and leather hides, and bacon and pork chops.
Level of Available Technology

Technology- the state of knowledge concerning the combination of resources to produce goods
and services.
An improvement in technology generally results in one or more of the inputs used in making the
good to be more productive. Increased productivity allows firms to make more of a good or
service with the same amount of inputs or the same output with fewer inputs. In either case, the
cost of producing a given level of output falls when firms use better technology, which would
lower the costs of production, increase profit, and increase the supply of the good to the market,
all other things remaining the same.
Expectation of Producers on the Future Price of the Good

If firms suddenly expect prices to be higher in the future and the product is not perishable,
producers can hold back output today and sell it later at a higher price. This has the effect of
shifting the current supply curve to the left.
Number of Firms
If the number of firms in the industry increases or if the productive capacity of existing firms
increases, more of the good or service will be supplied at each price.
Ex. The supply of air travel between New York and Hong Kong increases when either
more airlines begin servicing this route or when the firms currently servicing the route increase
their capacities to fly passengers by adding more jets to service their New York–Hong Kong
route.
A decrease in the number of firms in the industry or a decrease in the productive capacity of
existing firms decreases the supply of the good, all other things remaining constant.
Ex. Suppose a freeze in Florida decreases the number of firms by destroying entirely
some citrus growers. Alternatively, it might leave the number of growers unchanged but decrease
productive capacity by killing a portion of each grower’s trees. In either situation, the supply of
fruit decreases.
Other Factors
Taxes
Taxes increase the costs of producing and selling items. When costs of production increase, the
business will decrease its supply of the item.
Subsidies
Subsidies generally are payments the government makes to businesses or industries to keep them
producing or researching a product. For example, if an industry that the government deems
important is struggling, the government might give these businesses a certain amount of money
for every item they sell. This type of subsidy increases supply, because it decreases how much it
costs the business to produce an item.
Government Policies and Regulations

Example of a policy that can affect cost are the wide array of government regulations that require
firms to spend money to provide a cleaner environment or a safer workplace. Complying with
regulations increases costs.
Summary of the General Supply Function
where Qs, P, PI, Pr, T, Pe, and F are as defined earlier, h is an intercept parameter, and k, l, m, n,
r, and s are slope parameters. Each of the six factors that affect production is listed along with the
relation to quantity supplied (direct or inverse).
Shifts in Supply
Inverse Supply Function
P = f (Qs)
Any particular combination of price and quantity supplied on a supply curve can be interpreted
in either of two equivalent ways. A point on the supply schedule indicates either (1) the
maximum amount of a good or service that will be offered for sale at a specific price or (2) the
minimum price necessary to induce producers to offer a given quantity for sale.
Supply Price - the minimum price necessary to induce producers to offer a given quantity for
sale.
References:
Baye, Michael R. (2010). Managerial Economics and Business Strategy (7th ed.). New York,
NY: McGraw-Hill/Irwin
Thomas, Christopher R. and Maurice, Charles (2016). Managerial Economics: Foundations of
Business Analysis and Strategy (12th ed). New York, NY: McGraw-Hill Education

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SUPPLY

Direct Supply Function

Supply function: Qs = -400 + 20P

Qs = f (P, PI, Pr, T, Pe, F )

Prices of Inputs used in Production

Price of Goods Related in Production

Level of Available Technology

Expectation of Producers on the Future Price of the Good

Government Policies and Regulations

Summary of the General Supply Function

Inverse Supply Function

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