Supply, Price & Quantity (DP IB Economics)

Introduction to Supply

• Supply is the amount of a good/service that a producer is willing and able to supply at a given price in a given time period
  

• A supply curve is a graphical representation of the price and quantity supplied by producers

  • If data were plotted, it would be an actual curve. Economists, however, use straight lines so as to make analysis easier
     

• The supply curve is sloping upward as there is a positive relationship between the price and quantity supplied (QS)

  • Rational profit maximising producers would want to supply more as prices increase in order to maximise their profits
        

• The law of supply states that there is a positive (direct) relationship between quantity supplied and price, ceteris paribus

  • When the price rises the QS rises

  • When the price falls the QS falls
     

Individual and Market Supply

• Market supply is the combination of all the individual supply for a good/service

  • It is calculated by adding up the individual supply at each price level
      

The Monthly Market Supply of Bread from 4 Bakeries in a Small town

• Individual and market supply can also be represented graphically
   

  

Market supply for smart phones in December is predominantly the combination of iPhone and Samsung supply

Diagram Analysis

• In New York City, the market supply for smart phones in December is predominantly the combination of iPhone and Samsung supply

• At a price of $1000, the supply of iPhones is 300 units and the supply of Samsung phones is 320 units

• At a price of $1,000, the market supply of smart phones in New York City during December is 620 units

Assumptions Underlying the Law of Supply

• The law of supply is based on two key assumptions

  • The law of diminishing marginal returns

  • Increasing marginal costs
     

• Both of these assumptions focus on the cost-related factors that influence the supply decisions of producers

  • These assumptions explain why the supply curve slopes upward
     

Using Examples to Explain the Assumptions Underlying the Law of Supply

Movements Along a Supply Curve

• If price is the only factor that changes (ceteris paribus), there will be a change in the quantity supplied (QS)

  • This change is shown by a movement along the supply curve
      

A supply curve showing an extension in quantity supplied (QS) as prices increase and a contraction in quantity supplied (QS) as prices decrease

Diagram Analysis

• An increase in price from £7 to £9 leads to a movement up the supply curve from point A to B

  • Due to the increase in price, the quantity supplied has increased from 10 to 14 units

  • This movement is called an extension in QS
     

• A decrease in price from £7 to £4 leads to a movement down the supply curve from point A to C

  • Due to the decrease in price, the quantity supplied has decreased from 10 to 7 units

  • This movement is called a contraction in QS