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--INTRODUCTION--
If consumers determine what to produce through their demand at each price level it is of course the firms that will meet this demand through SUPPLY. So now let's learn about the concept of SUPPLY.
--DEFINITION--
SUPPLY INDICATES THE VARIOUS QUANTITIES OF A PRODUCT THE PRODUCER/MARKET IS WILLING & ABLE TO PROVIDE AT DIFFERENT POSSIBLE PRICES DURING A PARTICULAR TIME PERIOD, CETERIS PARIBUS.
--THE LAW OF SUPPLY--
--THE LAW OF SUPPLY--
--DEFINITION--
THE LAW OF SUPPLY= a LAW stating that there is a POSITIVE RELATIONSHIP between price (P) and quantity (Q) of a good supplied:
"THE HIGHER THE PRICE, THE HIGHER THE QUANTITY SUPPLIED, CETERIS PARIBUS, and vice versa."
--ASSUMPTIONS UNDERLYING THE SUPPLY CURVE--
***PRIMER ACTIVITY***
BALL FACTORY
FIRSTLY OPEN THE GOOGLE SHEET BY CLICKING HERE
NOW SET UP A ROW OF 10 STUDENTS (VARIABLE FACTOR) IN A SINGLE LNE (FIXED SPACE)
SET UP 2 BASKETS AT EACH END WITH ONE CONTAINING A LARGE NUMBER OF PAPER BALLS
EXPLAIN TO STUDENTS THAT THE AIM OF THE ACTIVITY IS TO PASS AS MANY OF THE BALLS FROM ONE BOX TO THE OTHER WITHIN 30 SECONDS. TIMER HERE
RULES ARE AS FOLLOWS:
NO THROWING OF BALLS
BALLS MUST BE 'PLACED' NOT 'DROPPED' N THE 2ND BASKET
ONLY THE PERSON CLOSEST TO THE 1ST BOX CAN TAKE BALLS OUT, ONE AT A TIME.
EACH STUDENT MUST HANDLE EVERY BALL EACH TIME
BALLS MUST BE PASSED HAND TO HAND
(APPOINT STUDENTS AS 'QUALITY CONTROL OFFICERS', TO DISQUALIFY BALLS THAT BREAK THE RULES)
AFTER EACH ROUND RECORD THE TOTAL, THEN REMOVE ONE STUDENT AND REPEAT.
FINALLY, AFTER ALL THE ROUNDS ARE COMPLETE TELL THE STUDENTS THAT THEY ALL EARNED $10 EACH PER 30-SECONDS AND THEN DERIVE THE COST CURVES, TO ILLUSTRATE INCREASING MARGINAL COSTS.
--'THE LAW OF DIMINISHING MARGINAL RETURNS'--
The majority of businesses can not simply increase output immediately, they need time to get get more of the factors of production they need, such as LABOUR and LAND, this period of time is called the SHORT-RUN.
At any one time, a firm's SCALE OF PRODUCTION (CAPACITY) IS LIMITED by the quantity and quality of the factors of production it has available, and it is this fact that results in the upward slope of the supply curve.
THE LAW OF DIMINISHING MARGINAL RETURNS, states that in the SHORT-RUN, as more and more of a VARIABLE INPUT is added to FIXED INPUTS, the MARGINAL PRODUCT of the variable input, INITIALLY INCREASES, but will EVENTUALLY DIMINISH (FALL). LINK
--'INCREASING MARGINAL COSTS'--
As shown above, THE LAW OF DIMINISHING MARGINAL RETURNS results in both the average and marginal output levels falling. If we assume that factor costs are fixed then both the average and marginal costs will rise.
--THE SUPPLY CURVE--
--THE SUPPLY CURVE--
--DEFINITION--
If we were to plot the relationship between price and quantity supplied we can derive the 'SUPPLY CURVE'.
--HOW THE SUPPLY-CURVE IS DERIVED--
As shown above, in the short-run, MARGINAL COSTS eventually rise.
A PROFIT-MAXIMISING producer will ALWAYS produce a unit AS LONG AS the PRICE they charge for it is HIGHER THAN THE MARGINAL COST of producing it (P>MC)
Note that if a firm is UNABLE to get its MC BELOW THE PRICE (A HIGH-COST PRODUCER), then it will not be willing to supply anything and therefore will not be part of EFFECTIVE SUPPLY.
This rising marginal cost means that eventually, it will rise to equal the chosen selling price (PRICE=MARGINAL COST) and A PROFIT-MAXIMISING PRODUCER will ALWAYS PRODUCE UP UNTIL THE UNIT at which the MARGINAL COST = THE SELLING PRICE and NO MORE PROFIT CAN BE ADDED.
THE HIGHER THE SELLING PRICE, the GREATER THE corresponding LEVEL OF OUTPUT at which PROFIT is MAXIIMISED and vice versa.
Each price has a corresponding a profit maximising level of output, which enables us to derive a supply curve.
NOTE: Each firm has different costs, the supply curve of LOW-COST PRODUCERS will start at lower prices than HIGH-COST PRODUCERS. As such as the price level rises the higher-cost producers will enter the market and as the price level falls they will leave the market.
--INDIVIDUAL & MARKET SUPPLY--
--INDIVIDUAL & MARKET SUPPLY--
--INDIVIDUAL--
INDIVIDUAL SUPPLY refers to the combination of price and quantity that a single firm is willing and able to supply.
--MARKET--
MARKET SUPPLY refers to the summation of individual firms supplying IDENTICAL products (HOMOGENOUS or UNDIFFERENTIATED).
--ESSAY TIME!--
EXPLAIN HOW THE SUPPLY CURVE OF A FIRM IS DERIVED [10]
Supply refers to....
The Law of supply refers to...
This relationship can be illustrated using a supply curve (See fig...)
As to why it is upward sloping, we need to first explain how in the short run, when output rise ......, increases.. this is referred to as the law of diminishing returns....
This effect, results in......, which leads to rising marginal costs...
As such.... MC-curve is actually the supply curve
derives the supply curve
--NON-PRICE DETERMINANTS--
--NON-PRICE DETERMINANTS--
--DEFINITION--
NON-PRICE DETERMINANTS OF SUPPLY refer to factors that result in changes (increases or decreases) in demand, even though the price has not changed. In other words these why are more/less of this good being supplied even though the price hasn't changed?
--𐤃COSTS OF PRODUCTION--
IF COSTS OF PRODUCTION RISE (FALL) THEN THE MARGINAL COSTS WILL RISE (FALL), CAUSING THE MARGINAL COST CURVE TO SHIFT UPWARDS (DOWNWARDS) MEANING FOR EACH PRICE LEVEL THE PROFIT-MAXIMISING LEVEL OF OUTPUT WILL BE LOWER (HIGHER). SHIFTING THE SUPPLY CURVE TO THE LEFT (RIGHT), AND VICE VERSA. CETERIS PARIBUS.
--𐤃PRICE OF A JOINTLY SUPPLIED GOOD--
A good that is SUPPLIED JOINTLY WITH ANOTHER GOOD is said to be in ‘JOINT SUPPLY’. According to the LAW OF SUPPLY, when the PRICE OF THE OTHER GOOD RISES, its QUANTITY SUPPLIED WILL ALSO RISE, and therefore there will be an INCREASE in the SUPPLY of its BY-PRODUCT, causing a RIGHTWARD SHIFT in its SUPPLY CURVE.
For example, a DECREASE (INCREASE) in the price of beef will DECREASE (INCREASE) the QUANTITY SUPPLIED of BEEF. ceteris paribus. As leather is in ‘JOINT-SUPPLY’ with beef, there will also be a DECREASE (INCREASE) in the SUPPLY of LEATHER causing the SUPPLY CURVE of leather to SHIFT to the LEFT (RIGHT), and vice versa.
--𐤃PRICE OF A GOOD IN COMPETITIVE SUPPLY--
QUICK QUESTION: If you owned a piece of land in Singapore and you had to choose between building a school or building private housing, what would you choose? What influenced your choice?
A good that USES THE SAME (SCARCE) FACTOR OF PRODUCTION AS ANOTHER GOOD is said to be in ‘COMPETITIVE SUPPLY’. If the price of one of these goods rises then, according to the law of supply, more of it will be supplied, this will mean more of the shared FOP will go to that good leaving less for the other, decreasing its supply, and vice versa.
For example, HOUSING and FARMING both require LAND, therefore if the PRICE OF HOUSING RISES then according to THE LAW OF SUPPLY, MORE OF IT WILL BE SUPPLIED, ceteris paribus, this will mean land owners now use MORE LAND FOR HOUSING rather than farming. This will result in a DECREASE IN THE SUPPLY OF AGRICULTURAL PRODUCE, which is shown by a LEFTWARD SHIFT in the SUPPLY CURVE and vice versa.
--TASK--
The IBDP Economics course requires you to write 3x 800-word INTERNAL ASSESSMENTS, requiring you to choose NEWS ARTICLES, to which you can apply economic theories and models. Below is an article related to the above concept.
Define concept.
Apply and Explain how this concept is occurring in the article.
Illustrate and explain concept with a correct and fully-labeled diagram.
Use data and quotes from the article as much as possible.
--𐤃INDIRECT TAX--
A UNIT TAX refers to A PER UNIT PAYMENT THAT MUST BE PAID TO THE GOVERNMENT BY THE PRODUCER AFTER THEY SELL THEIR PRODUCT. This payment is equivalent to an INCREASE IN THE COSTS OF PRODUCTION and LOWERS THE FINAL PRICE THE PRODUCER RECEIVES, hence they SUPPLY LESS at EACH PRICE LEVEL, resulting in a LEFTWARD SHIFT in the SUPPLY CURVE.
--𐤃SUBSIDIES--
A UNIT SUBSDY refers to A PER UNIT PAYMENT THAT IS PAID TO THE FIRM BY THE GOVERNMENT. This payment is equivalent to a DECREASE IN THE COSTS OF PRODUCTION and RAISES THE FINAL PRICE THE PRODUCER RECEIVES, hence they SUPPLY MORE at EACH PRICE LEVEL, resulting in a RIGHTWARD SHIFT in the SUPPLY CURVE.
--𐤃EXPECTATION--
If producers 'EXPECT' that FUTURE PRICES will RISE, they will likely REDUCE SUPPLY TODAY, so that they can supply and sell more in the future at the higher price.
For example, many property developers in HK are slow to develop new apartment complexes as they know the longer they wait the higher the likely price of the apartments.
EXPECTATIONS of A RISE IN PRICE => FALL IN SUPPLY
Conversely, If producers 'EXPECT' that FUTURE PRICES will FALL, they will likely INCREASE SUPPLY TODAY, so that they can supply and sell more at the higher price.
For example, football shirts change their design every season, therefore, suppliers will expect prices to rise before the season begins and then fall as the season progresses and finally ends, hence supply will increase early and then fall.
EXPECTATIONS of A FALL IN PRICE => RISE IN SUPPLY
--𐤃TASTES & PREFERENCES--
Given that the RATIONAL PRODUCER aims to SUPPLY THE GOODS AND SERVICES that CONSUMERS WANT, then clearly decisions about what to supply are often based on the tastes and preferences of consumers.
For example, the recent 'Pop-it' trend and Liverpool tops
--MOVEMENTS & SHIFTS--
--MOVEMENTS & SHIFTS--
--MOVEMENT--
A CHANGE IN QUANTITY SUPPLIED refers to a change in the quantity caused by a change in PRICE, hence it is reflected in a MOVEMENT ALONG the SUPPLY curve.
--SHIFTS--
A CHANGE IN SUPPLY refers to a change in the quantity caused by a change in NON-PRICE, FACTORS hence it is reflected in a SHIFT in the SUPPLY curve.
--TEST YOURSELF--
--TASK--
Go to https://onlinevideoconverter.pro/en19/youtube-video-downloader
Paste in the following youtube url: https://www.youtube.com/watch?v=m_5MkGbXXKc
Download as a MP4.
Upload the video file, then CREATE SUBTITLES that explain the REASONS for the INCREASE in the PRICE of LUMBER, which has increased by more than 252% during the Covid-19 pandemic in the US.
WATCH THE VIDEO 'How the Pandemic made lumber America's hottest commodity' (Available in the 'Class resources')
Create an INFOGRAPHIC to explain the non-price determinants of demand & supply that have caused the rise in the price of Canadian lumber as well as why tree-growers have not benefited while saw-mill owners have.
Title of your infographic: 'How the Pandemic made lumber America's hottest commodity'
Try to write it as a 'COMMENTARY'.
Infographic tools: venngage.com, piktochart.com, canva.com, or visme.co
Work in small groups if you like (max 3)
email me your efforts at robert_bounous@ofs.edu.sg
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