Lecture 3
Lecture 3
• A decrease in demand is shown as a shift of the demand curve to the left, as from D1 to D3.
These changes in demand are to be distinguished from a change in quantity demanded,
which is caused by a change in the price of the product, as shown by a movement from, say,
point a to point b on fixed demand curve D1.
Supply
Supply is a schedule or curve showing the amounts of a product that producers will make
available for sale at each of a series of possible prices during a specific period.
Other things equal, producers will offer more of a product for sale as its
price rises and less of the product for sale as its price falls
SHIFTS IN THE SUPPLY CURVE
1. Costs of Production and Supply
•The expenses a firm incurs in the process of producing goods or services. These include:
• Wages: Payment to labor.
• Raw Materials: Inputs like steel, oil, or fish feed in the case of fish farming.
• Energy: Fuel, electricity, etc.
• Rent: Costs for land or buildings.
• Machinery: Depreciation and maintenance costs of equipment.
•Impact of Rising Costs on Supply:
• When production costs rise, profits decrease, leading to a reduction in the quantity supplied at a given price.
• Supply Curve Shifts to the Left: A rise in production costs will cause the supply curve to shift from S₁ to S₂ (Figure
6.2). At the original price (P), the quantity supplied decreases from Q₁ to Q₂.
• Real-world Example: Rising costs of fish feed led to some fish farmers leaving the industry, reducing the quantity of
fish supplied.
•Impact of Falling Costs on Supply:
• When production costs fall, producing goods becomes more profitable, increasing the quantity supplied.
• Supply Curve Shifts to the Right: The supply curve moves from S₁ to S₃, increasing the quantity supplied at the same
price level from Q₁ to Q₃.
•Availability of Resources:
• Shortages of factors of production, such as labor, land, or capital, can increase costs, reducing the ability of
producers to supply the market.
• Example: If there’s a labor shortage, wages will rise, leading to higher production costs and a leftward shift in the
supply curve.
2. Indirect Taxesand Their Effect on Supply
• Indirect taxes are taxes levied on goods and services rather than on income or profits.
They include:
• Value-Added Tax (VAT): Applied to goods and services at each stage of production.
• Duties: Taxes on specific goods, such as petrol and cigarettes.
•Impact of Indirect Taxes on Supply:
• When indirect taxes are imposed or increased, they raise the cost of production.
• Supply Curve Shifts to the Left: As indirect taxes add to the production cost, the
supply curve shifts leftward, indicating a reduction in the quantity supplied at every
price.
• Example: A new tax on cigarettes will increase costs for producers, decreasing the
quantity of cigarettes supplied.
Indirect Taxes and Their Effect on Supply
•Effect on Supply:
• Imposition of Taxes: When indirect taxes are imposed or increased,
they raise the production costs for firms.
• Supply Curve Shifts Leftward: As production costs increase, the
supply curve shifts from S₁ to S₂, resulting in a decrease in the
quantity supplied (from Q₁ to Q₂) at the same price (P) (as shown
in Figure 6.2).
• Example: A new tax on cigarettes leads to higher production
costs, causing a reduction in the quantity of cigarettes available
in the market.
• Reduction of Taxes: When indirect taxes are reduced, production
costs fall, making it more profitable for firms to supply goods.
• Supply Curve Shifts Rightward: The supply curve shifts from S₁ to
S₃, and the quantity supplied increases from Q₁ to Q₃.
• Example: If a government reduces taxes on eco-friendly cars,
manufacturers can produce and supply more, increasing the
quantity available at the same price.
•.
•Government Objectives:
• Subsidies are typically used to promote essential goods, such as food or renewable
energy, or to support industries facing competition from foreign markets.
• They also help maintain employment by supporting industries that are vital for a
country’s economy.
4. The Role of Technology in Supply
•Advancements in Technology:
• Over time, technological innovation makes production
processes more efficient, lowering production costs for
firms.
• Effect on Supply:
• The introduction of new technology shifts the supply
curve to the right from S₁ to S₃, allowing firms to
produce more at the same price (P).
• Example: In the oil industry, new technology like lasers
and high-tech data analysis tools have helped
companies increase the yield from oil wells. This
reduced costs, allowing firms to supply more oil, as seen
after the drop in oil prices in 2014.
•Impact of Technology:
• Increased Efficiency: New technology allows for the production of more goods
with fewer inputs, improving productivity.
The increase in demand from D1 to D2 in (a) increases both equilibrium price and
equilibrium quantity. The decrease in demand from D3 to D4 in (b) decreases both
equilibrium price and equilibrium quantity
Changes in Demand, Supply, and Equilibrium
The increase in supply from S1 to S2 in (c) decreases equilibrium price and increases
equilibrium quantity. The decrease in supply from S3 to S4 in (d) increases equilibrium price
and decreases equilibrium quantity.