MODEL OF SUPPLY

The model of supply is an attempt to explain the

amount supplied of any good or service.

SUPPLY DEFINED
The amount of a good or service a firm wants to
sell, and is able to sell per unit time.

Supply slide 1
 THE “STANDARD” MODEL OF
SUPPLY
The DEPENDENT variable is the amount
supplied.
The INDEPENDENT variables are:
the good’s own price
the prices of inputs used in its production
the technology of production
taxes and subsidies

Supply slide 2
 YOU COULD WRITE THE MODEL
THIS WAY:
The supply function for tacos

QS(tacos) = S(Ptacos, Ptaco shells, Plettuce, Plabor,

Ptomatoes, . . . ,technology, taxes &
subsidies)

Supply slide 3
 THE SUPPLY CURVE

The supply curve for any good shows the

quantity supplied at each price, holding
constant all other determinants of supply.

The DEPENDENT variable is the quantity supplied.

The INDEPENDENT variable is the good’s own
price.

Supply slide 4
 THE LAW OF SUPPLY

The Law of Supply says that an increase in a

good’s own price will result in an increase in
the amount supplied, holding constant all the
other determinants of supply.

The Law of Supply says that supply curves are

positively sloped.

Supply slide 5
 A SUPPLY CURVE
A supply curve must look like this, i.e., be positively
sloped.

own supply
price

quantity supplied
TACO MARKET
Supply slide 6
 The supply curve means:

You pick a price, such a p0, and the supply curve shows
how much is supplied.
own
supply
price

p0

quantity supplied
Q0

Supply
TACO MARKET slide 7
 If the price of tacos rises, how is
the supply curve affected?
own supply
price

p0

quantity supplied
Q0
TACO MARKET

Supply Go to hidden slide slide 8

 AN IMPORTANT POINT

When drawing a supply curve notice that the

axes are reversed from the usual convention of
putting the dependent (y) variable on the
vertical axis, and the independent (x) variable
on the horizontal axis.

Supply slide 10
 ECONOMISTS HAVE
HYPOTHESES ABOUT HOW
CHANGES IN EACH OF THE
INDEPENDENT VARIABLES
AFFECTS THE AMOUNT
SUPPLIED

Supply slide 11
 Other factors affecting supply
The question here is how to show the effects of
changes in input prices, technology, and taxes.

The answer, of course, is that changes in input

prices, technology, or taxes cause the supply
curve to shift.

Supply slide 12
 Changes in input prices

Consider the supply of beer, and suppose the price of

hops, a crucial input to beer, falls. Beer firms
now find that beer production is more profitable
than it was before, and they respond to this be
increasing the supply of beer.

Supply slide 13
 The price of hops falls from
$300 per ton to $100 per ton.

own price supply @ hops price

of $300/ton

How
Howwill
willthis
thisaffect
affectthe
the
supply
supplycurve
curvefor
forbeer?
beer?

quantity
BEER MARKET
Supply Go to hidden slide slide 14
 Change in technology
An improvement in technology makes it
possible to produce a level of output with
fewer inputs than before.
Because this lowers the cost of production,
profits rise, and firms will try to supply
more.

Supply slide 16
 Suppose beer technology improves.

own price supply @ old

technology
How
Howdoes
doesthis
thisaffect
affect
the
thesupply
supplycurve
curvefor
forbeer?
beer?

quantity
BEER MARKET
Supply Go to hidden slide slide 17
How would you suspect an excise tax affects
the supply of a good?

price

S (no tax)

Q
Supply Go to hidden slide slide 19
 Supply summary
Supply is a function of own price, input prices,
and technology.
The supply curve shows supply as a function of
own price, all else constant.
Changes in a good’s own price show up as
movements along a supply curve.
Changes in input prices, technology, or taxes
show up as shifts in the supply curve.

Supply slide 21