3_2_The_supply_curve

3_2_The_supply_curve - Q i 1 = g i P 1 | P R1 P R2 … P 2...

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The supply curve As stated in the text, the basic determinants of market supply for a specific good such as Good 1 are (1) resource prices, which we can denote by P R1 , P R2 , and so on; (2) the state of technology, T ; (3) the number of producers in the market, N ; (4) taxes and subsidies, S 1 , S 2 , and so on; (4) the prices of related goods, P 2 , P 3 , and so on, and (5) expectations E . Consider a typical firm, which we will denote with the superscript “ i .” This firm produces some amount of good 1, Q 1 which provides it with the greatest profit. This amount will of course vary, depending on the price of good 1, the prices of its inputs, the available technology, taxes and subsidies, and the prices of related goods. We can write this relationship as: Q i 1 = g i ( P 1 ; P R1 , P R2 , …; P 2 , P 3 , …; S 1 , S 2 , …; T i ; E i ). This individual’s supply curve for good 1is found by holding constant the value of all variables other than the price of good 1and graphing the resulting relationship between Q i 1 and P 1 . This relationship is typically written
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Unformatted text preview: Q i 1 = g i ( P 1 | P R1 , P R2 , …; P 2 , P 3 , …; S 1 , S 2 , …; T i ; E i ). There are N firms, each of whom has similar supplies for good 1. The market supply for this good is simply the sum of all of the quantities supplied by the N firms at each possible price: Q 1 = ∑ = N 1 i i 1 Q = ∑ = N 1 i g i ( P 1 | P R1 , P R2 , …; P 2 , P 3 , …; S 1 , S 2 , …; T i ; E i ). For simplicity, this can be written as Q 1 = G 1 ( P 1 | P R , P 2 , S , T , E , N ). Written in this form, the function clearly shows that the market supply for a good is a relationship between the quantity supplied of a good and its price, holding constant the prices of its resources, the prices of all other goods, subsidies and taxes, the state of technology, and the number of suppliers. A change in any of the factors previously held constant will result in a different relationship between Q 1 and P 1 . We would call this new relationship a change in supply....
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