Supply - II The Supply Side The supply of a good is the...

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Unformatted text preview: II. The Supply Side The supply of a good is the amount of a good that suppliers are willing to sell in a given time period. Supply of a good depends upon 1. P of good 2. Costs (prices of inputs (Pi); technology (T); management) 3. Prices of related goods (Pr) Qs = g(P,Pi,T,Pr) Now let us consider these factors one at a time: The supply function shows the relationship between the price of a good and the quantity of a good supplied, other things being equal. Example: Coffee Qs=g(P)= .5P-.5,P>1 Qs = 1,000 lbs; P in $, P = $5, Qs = 2.5 - .5 = 2 Or: P = 1 + 2 Qs Supply schedule is a table showing the relationship between the price of a good and relationship between good Supply schedule is a table showing the the quantity of a the price of a good and the supplied other supplied other things quantity of a good things being equal. being equal. P 11 10 9 8 7 6 5 4 3 2 1 Qs 5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 Normally, the quantity of a good supplied is positively related to the price of a good. The higher the price of the good, the more profitable it is to produce the good. The nature of this relationship ultimately depends upon costs of producing the good. Normally, the quantity of a good supplied is positively related to the price of a good. The higher the price of the good, the more profitable it is to produce the good. The nature of this relationship ultimately depends upon costs of producing the good. Example. Supply curve is a graph showing the relationship between the price of a good and the quantity of a good supplied other things being equal. Note: There are two ways to interpret the supply schedule or supply curve. 1. It shows the maximum quantity of a good firms are willing to supply at any given price, other things being equal. 2. It shows the minimum price that firms must receive to get them to supply any give quantity of a good, other things being equal. The slope of the supply curve shows the amount by which price must rise to increase Qs by a unit or the amount by which price must fall to decrease Qs by a unit. The slope of the supply curve is determined by the nature of costs in the industry as output expands. Note: Changes in the price of a good lead to movements along the supply curve. We will always refer to movements along the supply curve as “changes in quantity supplied.” © Bryan L. Boulier, 2010. All rights reserved. ...
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This note was uploaded on 02/17/2011 for the course ECON 101 taught by Professor Fon during the Spring '06 term at GWU.

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