Holding most, but not all, things constant by using partial derivatives

Chapter 2: Supply and Demand: You Have What Consumers Want

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Figure 2-3:

Changes in quantity supplied.

Price changes cause changes in quantity supplied represented by movements along the supply curve. When the price of dog treats decreases from $5.00 to $1.00 in Figure 2-3, the quantity supplied decreases from 650 to 50 boxes per week — a movement from point C to point D on the supply curve. This movement indicates that a direct relationship exists between price and quantity supplied: Price and quantity supplied move in the same direction.

Shifting the supply curve

When economists focus on the relationship between price and quantity supplied, a lot of other things are held constant, such as production costs, technology, and the prices of goods producers consider related. When any one of these things changes, the entire supply curve shifts.

If an increase in supply occurs, the curve shifts to the right, as illustrated in Figure 2-4. In this case, an increase in supply shifted the curve from S0 to S1. As a result, more dog treats are provided at every possible price. For example, at a price of $5.00, 750 boxes of dog treats are provided each week instead of 650.

A rightward shift in the supply curve always indicates an increase in supply, while a leftward shift in the curve indicates a decrease in supply.

30 Part I: The Nature of Managerial Economics

Figure 2-4:

Changes (shifts) in supply.

The factors that shift the supply curve include

✓ Production costs: Input prices and resulting production costs are inversely related to supply. In other words, changes in input prices and production costs cause an opposite change in supply. If input prices and production costs increase, supply decreases; if input prices and production costs decrease, supply increases. For example, if wages or labor costs increase, the supply of the good decreases. ✓ Technology: Technological improvements in production shift the supply curve. Specifically, improvements in technology increase supply — a rightward shift in the supply curve. ✓ Prices of other goods: Price changes for other goods are a little complicated. First, in order to affect supply, producers must think the goods are related. What consumers think is irrelevant. For example, ranchers think beef and leather are related; they both come from a steer. However, as a consumer, please don’t serve me leather for dinner.

Beef and leather are an example of joint products, products produced together. For joint products, a direct relationship exists between a good’s price and the supply of its joint product. If the price of beef increases, ranchers raise more cattle, and the supply of beef’s joint product (leather) increases.

Producer substitutes also exist; using the same resources, a business can produce one good or the other. Corn and soybeans are examples of producer substitutes. If the price of corn increases, farmers grow more corn, and less land is available to grow soybeans. Soybeans’ supply decreases. An inverse relationship exists between a good’s price (corn) and the supply of its producer substitute (soybeans).