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Sellers
choose the quantity we want to sell based on the price
MU>MC
MU is utility expected from price
MC is the value of other uses of the item (including selling to different buyers)
If the seller’s 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.

AN IMPORTANT DISTINCTION:
SUPPLY
is a relationship;
QUANTITY SUPPLIED is the amount sellers are willing to provide


Price
Quantity Supplied
0
0
1
10
2
20
3
30
4
40
5
50
6
60
7
70
8
80
9
90
10
100

Price
Original
Quantity Supplied
New
Quantity Supplied
0
0
30
1
10
40
2
20
50
3
30
60
4
40
70
5
50
80
6
60
90
7
70
100
8
80
110
9
90
120
10
100
130

Supply can increase (moving the supply curve to the right) if

The opposites of these will reduce supply (move the curve to the 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.



Copyright 2006 by Ray Bromley. For economics information, and other information about Ray Bromley, visit www.raybromley.com. Permission to copy for educational use is granted, provided this notice is retained. All other rights reserved.
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