Unit 3_Theory of Supply

Unit 3_Theory of Supply - UNIT 3: THEORY OF SUPPLY The Law...

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UNIT 3: THEORY OF SUPPLY The Law of Supply Supply is a relation showing the various amounts of a commodity that sellers would be willing and able to make available for sale, at alternative prices, during a given period of time, ceteris paribus . Supply Schedule Table 3.1 below shows the quantity of buns supplied at various prices. Note that as price increases, quantity supplied also increases. Note too that the relationship between quantity supplied and price, applies for a given period of time, in this case, per day. Table 3.1: Quantity of buns supplied Price of buns ($) Quantity of buns supplied 0 0.5 1 1.5 2 2.5 3 0 0 1 2 3 4 5 The market supply curve can be found by summing individual supply curves. Individual supply curves are summed horizontally at every price. The market supply curve shows how the total quantity supplied varies as the price of the good varies. Insert figure 3.1 from the information in table 3.1 The Law of Supply Higher prices induce producers to offer more of their products during a given period. If prices fall, producers will offer less to the market. The greater the price, the greater are the profit incentives to produce and sell more of a product. The price of the product and the quantity supplied will be positively related, ceteris paribus . The higher the product's own price, the more its producers will supply and the lower the price, the less its producers will supply. Movement A change in the price of the good leads to a change in quantity supplied . This means that there will be a movement upward along the curve in the case of an increase in quantity supplied or a movement downward along the curve in the case of a decrease in quantity supplied. Insert figure 3.2 showing movement along the curve 1 | P a g e
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In figure 3.2 above, an increase in the price of buns from $2.00 to $2.50 causes an increase in quantity supplied from 3 to 4 buns. Thus there is movement from point A to point B on the curve indicated by the arrow. Shift A shift in the supply curve however occurs when there is a change in some factor, other than price. Price remains unchanged. Hence we say that a change in supply brings about a shift of the supply curve - the shift being caused by any factor but the price of the good. Non-Price Determinants of Supply The supply curve shows the relationship between price and the quantity supplied during some period, holding other influences on supply constant. Just as there are several determinants of demand other than price, there are also a number of important determinants of supply other than the price of the good. Input Prices The price of inputs used to produce a good can cause a change in supply. If input prices go up, suppliers seek to reduce supply at current prices. Or they will probably want a higher price than before in order to offer the same quantity of output for sale. This effect is represented by a leftward shift in the supply curve. Thus the higher the cost of any input used by a firm, the lower will be the amount that the firm will produce and offer for sale at any given price of the product. Taxation
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Unit 3_Theory of Supply - UNIT 3: THEORY OF SUPPLY The Law...

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