2.

3A
Markets & Supply
Supply Curve
The Law of Supply
Market Supply

UNIT 2: MICROECONOMICS ~ Competitive Markets

Source (unless otherwise noted): Tragakes, Ellie. Economics for the IB Diploma. Third ed., Cambridge University Press, 2020 (Chp. 2 (2.3)
 INTRODUCING “SUPPLY”
In the last lesson you learned about In this lesson, you will learn about
Demand... Supply...

...which is concerned with the … which is concerned with the

behaviour of consumers or behaviour of sellers (includes firms in
buyers. the product markets and households in the
resource markets)
 What is Supply?
● Firms (businesses) produce goods & services
● Firms supply the goods and services produced to the product markets for sale
● As sellers, firms are suppliers of goods and services.

Supply
Indicates the various quantities of a good that firms (or a firm) are willing and able
to produce and sell at different possible prices during a particular time period,
ceteris paribus

“All other things ● For supply (just like demand), price is only one
being equal” or thing that influences how much a firm
constant supplies…therefore, we use the ceteris paribus
assumption.
 What do you think?
Taylor is the owner of a steel refinery (manufacturer of steel) in
Hamilton Ontario.

In November, the price of a ton of steel was $500. By

December, the price of a ton of steel increased to $750 per ton.

What do you think Taylor did at the steel mill in response to the
price increase?

A) Shut down 3 of the 6 smelters at the steel plant, reducing

steel production;

B) Lay off workers to reduce production; or

C) Hired more workers in order to increase the production of

steel.
 What is Supply?

Question:
Will firms be willing and able to produce and sell a product at higher prices or at lower
prices? Why?

Rationale:
● Price is what sellers or producers receive for supplying their goods/services
● An increase in price encourages “profit-seeking” firms/producers to produce
more goods/services →incentives
● firms/producers seek to maximize profits

● Different producers have different costs.

○ Some are more efficient than others; thus they can produce their products at a
lower marginal cost (the cost of producing each extra or additional good)
○ Firms with lower costs are willing to sell their products at a lower price.
 Presentation of Supply
● Like demand, Supply can be presented in a table or Supply Schedule or in a
diagram → Supply Curve
● Both show the various quantities of a good the firm is willing and able to
produce and supply at various prices

Price of Quantity of
chocolate bars chocolate bars
($) supplied (per week)

5 600

4 500

3 400

2 300

1 200
 The Supply Curve

● Price goes on the Y-axis (“P”), and

● Quantity on the X-axis (“Q”)

● The supply curve for different

markets may vary in steepness, but
is almost always upward sloping

● Supply curve is labelled “S”

 Presentation of Supply
Price of chocolate Quantity of chocolate
bars ($) bars supplied (per week)

5 600

4 500

3 400

2 300

1 200

● Both the supply schedule and supply curve tell us only how many bars firms would
be prepared to supply at each price and NOT how many bars the firm will actually
supply to the market nor what price firms will receive

● Example: At $4, firm are prepared to produce and supply 500 bars/week but at $3 only
400 bars/week
 The Supply Curve & the Law of Supply
Supply Curve illustrates an important relationship:

● As prices increases, quantity supplied also

increases

● Two variables (P & Q) change in the same

direction → a positive or “direct”
relationship

● This is a “causal relationship”:

○ As price changes, this causes a change in
quantity supplied
 THE LAW OF SUPPLY
Law of Supply:

There is a positive relationship between the

quantity of a good supplied over a particular time Price Supply
period and its price, ceteris paribus:

● As price of a good increases, the quantity of

the good supplied also increases;

● As the price of a good falls, the quantity of

the good supplied also falls, Price Supply

Ceteris paribus
 Individual Supply to Market Supply
Market Supply:
● The total quantities of a good that firms are willing and able to supply in the
market at different possible prices
● The horizontal summation of all individual supplies of that good.
 The Vertical Supply Curve
● Supply curve is vertical in certain special circumstances
● Represents the situation where the quantity of a good
cannot increase no matter what the price of the good is
● Quantity supplied is independent of price

Can you think of applicable examples?

Two reasons why this might be the case:
1. There is a fixed quantity of the good supplied because there
is no time to produce more of it.
a. Ex. fixed number of tickets for one show since there are only a
fixed number of seats available;

2. There is a fixed quantity of the good supplied because there

is no possibility of ever producing more of the good.
a. Ex. original DaVinci painting or antique ~ Stradivarius violins
for example (you cannot make any more originals of these
goods)