Supply and Demand 7.pptVIP

* * * * * * * Increases or Decreases in Supply Price is only one variable that will affect the supply relationship. Any variable (other than price) that changes supply is called a determinant of supply. An increase in supply indicates that quantity supplied has increased at every possible price level. This usually means that there is more competition in the market or production costs have fallen. A decrease in supply indicates that quantity supplied has decreased at every price level. This is associated with less competition in the market or higher costs of production. Changes in Supply vs. Changes in Quantity Supplied There is a difference between a change in supply and a change in quantity supplied. If producers sell more or less due to a price change, that is a change in quantity supplied. Supply does not change because this relationship is already part of the supply curve. The price of the good is NOT a determinant of supply (a change in price shifts quantity demanded, not supply). Price Quantity Supplied $2 50 4 70 6 90 8 100 Price Quantity Supplied $2 75 4 90 6 130 8 150 An increase in supply. Quantity supplied has increased at all price levels. The change cannot be due to price only. Price Quantity Supplied $2 50 4 70 6 90 8 100 An increase in quantity supplied. Prices have risen and quantity supplied rises as well. We do not need to rewrite the relationship between price and quantity supplied. If prices fall back down to $2, quantity supplied will return to 50. Visual Changes in Supply Quantity Supplied Price An increase in supply is illustrated by a shift of the supply curve to the right. Price Quantity Supplied Price A decrease in supply is illustrated by a shift of the supply curve to the left. A change in price does not increase or decrease supply. It changes quantity supplied, which is illustrated by a movement along the supply curve. In this case, the price has increased (we move up), and as a result, quantity supplied has increased (we moved