Demand, Supply and Equilibrium by Frieda Mendelsohn
As we learn about the mechanics of SUPPLY, we'll be following Jill at her chicken farm. Jill raises chickens on her farm. When the packinghouse offers her higher prices, she allows more fertilized eggs to hatch. When lower prices are offered, she keeps the rooster away from the hens and hatches fewer chickens. So, the higher the price of chickens, the more she’s willing to sell; and the lower the price of chickens, the fewer she’s willing to sell.
The table and the graph (right) both show how many pounds (in hundreds) of chicken Jill is willing to sell (each week).
Supply is the amount sellers are willing to sell at each price. Supply refers to the schedule relating quantity sold to price per unit; for a given price, the schedule gives the quantity supplied. Thus, a change in the price of the good never changes the supply of that good – it changes the quantity supplied. Does this sound familiar? It should – it’s the same explanation as that made for demand vs. quantity demanded.
Again, supply is the whole line. It is the whole table of price and quantity combinations. Let’s look at some of the factors, which change supply (shift the curve).
Suppose the price of chicken feed goes up. Jill is willing to feed fewer chickens at each price for which she could sell chicken, so this will decrease her supply of chickens.
So, supply will change in response to a change in the price of an input to the production process.
DIRECTION OF SUPPLY SHIFT
The table of prices and quantities has changed – at each price; she’s willing to sell less. Supply has decreased. The changed table corresponds to the shifted supply curve, S’.
Are you surprised at the direction of the supply curve shift? Look at the quantity supplied at $4.00/lb. At the original supply, 4 lbs per week will be supplied. Now, however, Jill is willing to only sell 2 lbs per week. This is a decrease in supply.
DIRECTION OF SUPPLY SHIFT - EXERCISE
Jill is afraid she will lose her workers. A new factory opened down the road and they’re offering higher wages than she is. So, Jill decides to raise her wages, too. What will happen to her willingness to supply chickens at each price?
Jill is willing to sell fewer chickens at each price. Jill’s workers must be paid at least as much as they could receive somewhere else if she is to keep them. She can now afford to raise fewer chickens at each price of chicken. This is a decrease in supply.
Jill is always interested in the latest technology. She just bought a new gizmo, which will reduce her costs of production for each additional chicken. What will happen to her willingness to supply chickens at each price?
Since her cost of producing each chicken has decreased, she’s willing to produce more chickens at each price. This is an increase in supply.
As you can see, the supply has increased. At $3.00/lb, Jill’s willingness to sell chickens has increased from 3 to 4 lbs.
TECHNOLOGY - EXERCISE
Refrigerator trucks allow chickens to be transported already plucked and dressed (rather than live). This reduces the cost to Jill of getting each chicken to market. What happened to the supply of chicken when refrigerator trucks were invented?
The supply curve will change in response to a change in technology. Since the cost of producing each chicken is lower, Jill is willing to sell more chickens at each price of chickens. This is an increase in supply
There’s another obvious cause of problems for Jill – her chickens could all die from a drought or disease, the fox could get into the henhouse, or environmental pollution could cause the egg shells to be too thin. In each case, Jill is less willing to sell chickens – she just doesn’t have them! So, the supply of chickens decreases.
OTHER OPPORTUNITY COSTS
Other opportunity costs also play a large role in Jill’s willingness to supply chickens. That is, what else could she do with her resources other than raising and selling chickens?
The most obvious alternative to raising chickens for meat is to sell eggs. So, when the price of eggs rises, Jill will sell more eggs and keep more chickens for laying (remember, dead chickens don’t lay eggs). This will decrease the number of chickens Jill is willing to send to market each week at the same prices; this is a decrease in supply of chickens.
OTHER OPPORTUNITY COSTS - EXERCISE
Jill has a new job offer. “The Plant” has offered her a top management position, which will pay much more than she makes raising chickens. What do you think will happen to Jill’s willingness to continue raising and selling chickens?
The supply curve will change in response to a change in opportunity costs. Jill’s opportunity cost has just increased – since she can make more money doing something else, her willingness to sell chickens at each price has decreased (or vanished). This is a decrease in supply.
SUPPLY OR QUANTITY SUPPLIED
As with demand, it is important to be able to distinguish between those factors which change supply, and those which merely move from one point to another along the supply curve. Again, a change in the price will not change the supply – it will change the amount Jill is willing to sell.
For example, in the early 1970’s, President Nixon reduced the price of chicken (among other things). At the lower price per lb, farmers couldn’t afford to feed their chickens, so they killed the baby chicks (it made a very dramatic photo for the evening news). This was not a change in supply – if farmers had been offered the old price per lb, they’d have been willing the former quantity of chicken.
Note that the new, lower prices led to less chicken being available to consumers.
SUPPLY OR QUANTITY SUPPLIED - EXERCISE
Suppose there’s a salmonella scare. People stop buying chicken and the price goes down. What happens to Jill’s supply of chicken?
Only the price has changed. This is a change in demand, not in supply! None of Jill’s costs of production have changed – she is willing to sell the same quantity of chicken at each price of chicken as before. Yes, I know that there will be an effect on her sales – please be patient!
The following will cause a change in supply (shift of the curve):
Technology changes have made electronic components less and less expensive. What happened to the supply of calculators?
The supply curve will change in response to a change in inputs. Calculators are made of electronic components. The lower the price of the inputs, the more calculators that manufacturers are willing to sell at each price. Supply increases.
The Gizmo Corporation just negotiated a new contract with its union. The union has agreed to a reduction in the hourly wages for the next year. What will happen to Gizmo Corporation’s supply?
The supply curve will change in response to a change in inputs. Again, the cost of production falls when the price of an input falls. In this case, wages will be lower so the Gizmo Corporation will be able to produce more gizmos at each price of gizmos. This is an increase in supply.
Suppose the babysitters in the neighborhood get together and decide to charge $20 per hour. What will happen to their supply of babysitting services? (Forget, for now, whether anyone will pay that much)
Only the price has changed. As you can see from the graph, at a higher price, babysitters are willing to offer more hours for sale. That doesn’t mean anyone will pay it! We’ll look at that in the module on equilibrium.
Suppose the price of steel increases because the government has established quotas for steel imports. What will happen to the supply of cars?
The supply curve will change in response to a change in inputs. Cars are made of steel, among other things. The higher the price of steel, the fewer cars will be offered for sale at each price. This is a decrease in supply.
There is a drought in Brazil and the coffee crop is smaller than usual. What do you think will happen to the supply of coffee?
The supply curve will change in response to a change in nature. There just isn’t as much coffee available for sale now that the drought has caused a bad crop.