pcecon.com Class Notes
Sellers AN IMPORTANT DISTINCTION: The opposites of these will reduce supply (move the curve to the left)
choose the quantity we want to sell based on the price
MU is utility expected from price
MC is the value of other uses of the item (including selling to different buyers)
If the sellers MU (price) is greater than the marginal opportunity cost , then the seller is willing to sell the item, otherwise it is not.
At minimum, the price must be a little above the MC for the seller to be willing to sell
quantity supplied is the amount sellers are able and willing to sell at a particular price
We observe that, ceteris paribus, at a higher price, the quantity supplied (made available) by suppliers is larger than it is at a lower price. This rule or law concerning price and quantity supplied is called the LAW OF SUPPLY
Another way of stating the law of supply is to say that "the relationship between the price of a good and the quantity supplied of the good is a positive, direct relationship, ceteris paribus."
Why we believe the Law of Supply is true
increasing marginal (opportunity) cost
MU vs MC
MU of the seller is the price paid for the good
the MC goes up as the quantity goes up
since the MU to the seller is the price, the price has to go up as the quantity (sold or offerred) goes up to make the sale worthwhile to the seller
The relationship between the price of a good and the quantity supplied of the good (ceteris paribus) is called SUPPLY.
SUPPLY is a relationship;
QUANTITY SUPPLIED is the amount sellers are willing to provide
2. ALGEBRA FORMULA:
In all of these cases, the quantity supplied changes if the price changes, but supply does not change if price changes, because the table, formula or graph does not change when price changes (price changes are "built in"). When price changes, we simply look at a different part on the table, or insert different numbers in the formula, or look at a different part of the supply curve. The result is a different quantity supplied for different prices, but SUPPLY is not a number, it is how all of the price numbers interact with the quantity supplied numbers. That interaction is the same, even if price changes.
Even though a change in price alone will not change SUPPLU, it is possible for supply to change. However, a change in supply means we put different quantity supplied numbers on the table for each price, or write a different algebra formula, or make a new supply curve graph.
For example, if the quantity supplied numbers are bigger for every price than they used to be, we might get the following ways of viewing supply:
Three Ways to Depict a Change in SUPPLY (an example)
1. TABLE OF NUMBERS:
2. ALGEBRA FORMULA:
Notice that these changes in supply mean that now there is a new, larger quantity supplied at each price. This is necessary if we are to say that "supply has increased." There is a new relationship between price and quantity supplied. The old relationship (and numbers) are no longer in effect.
Notice also, with the graph of the supply curve, it is important to think of the increase of supply as moving the curve to the right. To remember this, think
Rays Right----Raise Right, ( and Lower Left)
A change in the price of a good will not change supply for that good; if the price changes, quantity supplied will change. One of the things listed in green above is necessary for supply to change.
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AN IMPORTANT DISTINCTION:
The opposites of these will reduce supply (move the curve to the left)