THEORY OF SUPPLY Lecture Notes, Slides of Managerial Economics

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THEORY OF SUPPLY

WHAT IS SUPPLY?

SUPPLY – quantities of goods & services that sellers are willing & able to sell/produce at different prices in a given period of time

Quantity Supplied

+ the number that will be

supplied or produced to the

public at a given price

SUPPLY FUNCTION

Qs = c + dP

Qs = 10 + 2P Price Quantity Supplied (Qs) 0 10 1 12 2 14 3 16 4 18 5 20

SUPPLY CURVE

• is a graph of the relationship between the price of a good and the quantity supplied Upward Sloping P Qs

FACTORS AFFECTING SUPPLY

1. Number of Firms
2. Technology
3. Prices of Inputs
4. Price Expectations
5. Taxes & Subsidies
6. Prices of Related Goods

1. Number of Firms (F)

F S

F S

DIRECT

3. Prices of Inputs (Pi)

Pi (^) S Pi (^) S INVERSE

4. Price Expectations (Pe)

Pe (^) S Pe (^) S INVERSE

5. Taxes & Subsidies

SUBSIDIES (S )

S S

S S

DIRECT B B B

6. Price of Related Goods

SUBSTITUTES (Ps) Ps (^) S Ps (^) S INVERSE

CHANGE IN QUANTITY SUPPLIED VS. CHANGE IN SUPPLY Change in Quantity Supplied

• Affected by the price
• Related to the Law of Supply