ECO-101 Micro Economic Lecture 3

1. SUPPLY
Micro Lecture 3

2. Answer please!!!
 Explain law of demand.
 Differentiate dependent & independent variables.
 Why does demand curve slope downward?
 What are the determinants of demand?
 What happens to the demand curve when any of
these determinants change? Explain by making
curves.
 Distinguish between change in demand and change in
quantity demand explain through diagrams.
 Show extension & contraction of demand on curve.

3. Objectives
By the end of the lecture students will be
able to
 Define supply, law of supply
 Draw supply curve
 Make their own product’s supply curve
 Explain movement along supply curve &
shift in supply curve
 Enlist market determinants of supply &
show their effects on the supply curve

4. Supply
Quantity supplied is the amount of a
good that sellers are willing and
able to sell.

5. Supply Curve
$3.00
2.50
2.00
1.50
1.00
0.50
21 3 4 5 6 7 8 9 10 1211
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
0

6. Law of Supply
The law of supply states that
(Ceteris paribus) other things
remaining constant there is a direct
(positive) relationship between
price and quantity supplied.

7. Change in Quantity Supplied
1 5
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
0
S
1.00
A
C
$3.00

8. Price and Quantity Supplied:
The Law of Supply8 of
48
• A supply curve is a graph illustrating how much of a
product a firm will supply per period of time at different
prices.
0
1
2
3
4
5
6
0 10 20 30 40 50
Thousands of bushels of soybeans
produced per year
Priceofsoybeansperbushel($)
PRICE
(PER
BUSHEL)
QUANTITY
SUPPLIED
(THOUSANDS
OF BUSHELS
PER YEAR)
$ 2 0
1.75 10
2.25 20
3.00 30
4.00 45
5.00 45
CLARENCE BROWN'S
SUPPLY SCHEDULE
FOR SOYBEANS

9. Activity
 Make your Market Supply Curve.

10. Market Supply
Market supply refers to the sum of
all individual supplies for all sellers
of a particular good or service.
Graphically, individual supply curves
are summed horizontally to obtain
the market supply curve.

11. From Individual Supply to Market Supply
 The supply of a good or service can
be defined for an individual firm, or
for a group of firms that make up a
market or an industry.
 Market supply is the sum of all the
quantities of a good or service
supplied per period by all the firms
selling in the market for that good or
service.

12. From Individual Supply to Market Supply
 As with market demand, market
supply is the horizontal summation
of individual firms’ supply curves.

13. Activity
 Make market supply curve.

14. Determinants of Supply
1. Market price
2. Input prices
3. Technology
4. Expectations
5. Number of producers
6. What are some examples?

15. Change in Supply
Price of
Ice-Cream
Cone
Quantity of
Ice-Cream
Cones
0
S1
S2
S3
Increase in
Supply
Decrease in
Supply

16. 1.Resource Cost [wages & raw materials] [Inverse]
Wages
Raw Materials
S
If resource cost
decreases
supply
Increases
[making more $]
If resource cost
increases
supply
Decreases
[making less $]S
S
P

17. P1
P1
QS1
“Substitutes in production”I only have
200 acres
S
S1
P
S2
QS1
S1
P
S2
S
Producers want to produce more of the good where price is increasing,
or at least, where the price is not going down.
P2
QS2
P2
QS2

18. S
Because cows
produce more
milk, farmers
don’t have to
have as many
cows.[saves $]
S
P
Supply curve
moves “udderly”
to the right.
Less skin abrasions
so happier cows
produce more milk.
Mooooove over and give me that waterbed.

19. S3
[Inverse]
P
If business have their taxes decreased,
it moves the supply curve to the right.
S1 S2
If business have their taxes increased,
it moves the supply curve to the left.
I’m losing
profits.”

20. Shift of Supply Versus
Movement Along a Supply Curve
20 of 48
• A higher price causes
higher quantity supplied,
and a move along the
demand curve.
• A change in determinants of
supply other than price causes
an increase in supply, or a
shift of the entire supply curve,
from SA to SB.

21. • In this example, since the factor
affecting supply is not the price of
soybeans but a technological
change in soybean production,
there is a shift of the supply curve
rather than a movement along the
supply curve.
• The technological advance means that more output
can be supplied for at any given price level.
Shift of Supply Curve for Soybeans
Following Development of a New Seed Strain

22. To summarize:
Change in price of a good or service
leads to
Change in quantity supplied
(Movement along the curve).
Change in costs, input prices, technology, or prices of related goods and
services
leads to
Change in supply
(Shift of curve).
Shift of Supply Versus
Movement Along a Supply Curve

23. Increases in Demand and
Supply
 Higher demand leads to higher
equilibrium price and higher
equilibrium quantity.
 Higher supply leads to lower
equilibrium price and higher
equilibrium quantity.

24. Decreases in Demand and
Supply
 Lower demand leads to lower
price and lower quantity
exchanged.
 Lower supply leads to higher
price and lower quantity
exchanged.

25. Relative Magnitudes of Change
• The relative magnitudes of change in supply and
demand determine the outcome of market equilibrium.

26. Relative Magnitudes of Change
• When supply and demand both increase, quantity
will increase, but price may go up or down.