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University of Calgary
Business and Environment
BSEN 401
William Huddleston

SUPPLY: Definition: Supply is the quantities of goods and services supplied by firms at every price ceteris paribus Supply is the relationship between 2 variables, price (P) and quantity supplied (q for the firm and Q for the industry, the sum of the firms), holding all other variables constant. The most important of the ceteris paribus conditions are the length of the supply period, the costs of inputs into production, the prices of other goods (Pi where ‘i’ represents one of n commodities), and technology. We can express the Supply for the x commodity as S(qXor Q X: qXor Q X f(P XInputs Costs, Pi, Time Period, Technology) Note: Supply is defined for quantity supplied in response to price not vice versa. Supply is therefore a competitive concept so that monopolies, for example, do not have supply functions. Law of Supply: Quantity Supplied is positively related to Price Constant input costs imply that an increase in price will increase profit and thus quantity supplied. The quantity supplied only increases to the point where price equals opportunity cost. Analyzing the supply function is a key part of this course but we will leave it until later. Example: The following table shows the number of kilograms of ground beef supplied by a firm during a year to given prices of ground beef, ceteris paribus. Price $5 $4 $3 $2 $1 Quantity 40 15 25 10 0 We graph this relation with Price on the vertical axis and quantity on the horizontal axis. Price ($s) So 5 4 3 2 1 10 20 30 40 50 60 Quantity (kilos) Note: A change in the price of the commodity implies a change in quantity supplied but not a change in supply. A change in a ceteris paribus condition implies a change in supply. Changes (shifts) in Supply: 1. A change in Per Unit Costs Supply gives us the amount that a firm would produce at a given price so Supply is essentially determined by the firm’s costs. A change in per unit costs changes the cost of producing a unit of output and thus changes the amount that a firm will produce. An increase in costs per unit of output means that the firm has to charge more to cover costs; supply therefore shifts up by the amount of the increase in per unit costs. We say that supply decreases in this case because the firm decreases quantity supplied at any given price. Example. The graph below shows the fall in supply due to an increase in costs of $1 per unit. Supply: Increase in Cost of $1/unit S Price ($s) 1 So 5 4 3 2 1 10 20 30 40 50 60 Quantity (kilos) 2. Changes in Technology . An improvement in technology implies an increase in output for given resources. Supply increases because quantity supplied increases at every price. You could also see this as a decrease in the cost of production of every unit of output. Increase in Supply: Technological Improvement Price ($s) So S1 5 4 3 2 1 10 20 30 40 50 60 Quantity (kilos) 3. Changes in the Price of related Output We now discuss the effect on supply of changes in the price of substitutes and complements in production. It is very important to remember that we refer to output and not input prices. a) Substitutes in Production (Alternative Products) (Qx/P SubP< 0 or dQx/d P SubP< 0) A firm usually has the possibility of producing more than one product with the same resources. An increase (decrease) in the price of a substitute product causes a decrease (increase) in the supply of the original product because the firm switches resources from the original product to the other product. Example: Suppose that the price of wheat and the price of oats are both $1/bushel in equilibrium and that a farmer cultivates 50 hectares of wheat and 50 hectares of oats as a result. An increase in the price of oats to $1.50 (perhaps due to an increase in demand) increases the quantity supplied of oats because the farmer now cultivates 70 hectares of oats. This means that the farmer is cultivating only 30 hectares of wheat at $1/wheat. The supply of wheat has therefore fallen. Decrease in Supply (Wheat) in response to Increase in Price of Substitute Product (Oats) Price ($s) Oats Price ($s) Wheat
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