Overview
This lecture explains the economic concept of supply, the law of supply, movements along and shifts of the supply curve, and the factors influencing supply.
Definition of Supply
- Supply is the quantity of a good or service producers are willing and able to sell at a given price in a given time period.
- Willingness and ability refer to the producer’s motivation and capacity to supply at specific prices.
The Law of Supply
- The law of supply states there is a direct relationship between price and quantity supplied.
- As price increases, quantity supplied increases; as price decreases, quantity supplied decreases.
- The supply curve is upward sloping to reflect this direct relationship.
- Movements along the supply curve are called extensions (when price rises) and contractions (when price falls).
- Changes in the price of the good itself cause movement along the supply curve.
Reason for Upward Slope
- The profit motive explains why higher prices lead to higher quantities supplied.
- Higher prices mean greater potential profit, encouraging producers to supply more.
- Increased production requires higher prices to cover rising costs.
Shifts in the Supply Curve (Non-Price Factors)
- Non-price factors shift the entire supply curve right (increase supply) or left (decrease supply) at the same price.
- Most non-price factors affect costs of production, influencing willingness and ability to supply.
Non-Price Factors Affecting Supply (PINTeS WC)
- Productivity: Higher productivity reduces costs and shifts supply right; lower productivity does the opposite.
- Indirect Taxes: Higher taxes increase costs and shift supply left; lower taxes shift it right.
- Number of Firms: More firms increase supply (shift right); fewer firms decrease supply (shift left).
- Technology: Better technology lowers costs and shifts supply right; outdated tech shifts it left.
- Subsidies: Government grants lower production costs and shift supply right; removed subsidies shift it left.
- Weather: Good weather increases supply (shift right); bad weather decreases supply (shift left).
- Costs of Production: Higher/lower costs (wages, raw materials, rents, regulations) shift supply left/right.
Key Terms & Definitions
- Supply — quantity of a good or service producers are willing and able to sell at a certain price in a time period.
- Law of Supply — direct relationship between price and quantity supplied.
- Supply Curve — upward-sloping graph showing relationship between price and quantity supplied.
- Extension of Supply — movement up the supply curve as price increases.
- Contraction of Supply — movement down the supply curve as price decreases.
- Shifts in Supply Curve — changes in supply due to non-price factors.
- Profit Motive — incentive for producers to supply more at higher prices to earn more profit.
- Indirect Tax — tax on production that raises costs for firms.
- Subsidy — government payment to producers to lower costs and increase supply.
Action Items / Next Steps
- Review lecture on demand to reinforce related concepts.
- Prepare for the next lecture on market equilibrium.