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Table 2 shows the relationship between the price of beef and its quantity supplied. Tables
such as this one are called supply schedules; they show how much sellers are willing to A supply schedule is a
table showing how the
provide during a specified period at alternative possible prices. This particular supply
quantity supplied of some
schedule tells us that a low price like $7.00 per pound will induce suppliers to provide
product changes as the
only 50 million pounds, whereas a higher price like $7.30 will induce them to provide
price of that product
much more”55 million pounds. changes during a specified
period of time, holding all
other determinants of
quantity supplied constant.
This analysis is carried out in much greater detail in later chapters.
4




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Part 1
62 Getting Acquainted with Economics



F I GU R E 4 TABLE 2
Supply Schedule for Beef
Supply Curve for Beef
Price Quantity Label in
a per Pound Supplied Figure 4
$7.50 S
a
$7.50 90
b
7.40 b
7.40 80
c c
7.30 70
Price per Pound




7.30
e
7.20 60
e
f
7.10 50
7.20
g
7.00 40
f
h
6.90 30
7.10
g
NOTE: Quantity is in pounds per year.
7.00
h
6.90
S

0 30 40 50 60 70 80 90
Quantity Supplied
in Millions of Pounds per Year




As you might have guessed, when such information is plotted on a graph, it is called a
supply curve. Figure 4 is the supply curve corresponding to the supply schedule in Table 2,
A supply curve is a graph-
ical depiction of a supply showing the relationship between the price of beef and the quantity supplied. It slopes up-
schedule. It shows how the ward”it has a positive slope”because quantity supplied is higher when price is higher.
quantity supplied of some
Notice again the same phrase in the definition: “holding all other determinants of quantity
product will change as the
supplied constant.” What are these “other determinants”?
price of that product
changes during a specified
period of time, holding all
Shifts of the Supply Curve
other determinants of
quantity supplied constant.
Like quantity demanded, the quantity supplied in a market typically responds to many
influences other than price. The weather, the cost of feed, the number and size of farms,
and a variety of other factors all influence how much beef will be brought to market.
Because the supply curve depicts only the relationship between the price of beef and
the quantity of beef supplied, holding all other influences constant, a change in any of
these other determinants of quantity supplied will cause the entire supply curve to
shift. That is:
A change in the price of the good causes a movement along a fixed supply curve. Price
is not the only influence on quantity supplied, however. If any of these other influences
change, the entire supply curve shifts.

Figure 5 depicts this distinction graphically. A rise in price from $7.10 to $7.30 will
raise quantity supplied by moving along supply curve S0S0 from point f to point c. Any
rise in quantity supplied attributable to an influence other than price, however, will shift
the entire supply curve outward to the right, from S0S0 to S1S1, as shown by the brick
arrows. Let us consider what some of these other influences are and how they shift the
supply curve.

Size of the Industry We begin with the most obvious influence. If more farmers en-
ter the beef industry, the quantity supplied at any given price will increase. For exam-
ple, if each farm provides 60,000 pounds of beef per year at a price of $7.10 per pound,
then 100,000 farmers would provide 600 million pounds, but 130,000 farmers would
provide 780,000 million. Thus, when more farms are in the industry, the quantity of beef
supplied will be greater at any given price”and hence the supply curve will move far-
ther to the right.



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Chapter 4 63
Supply and Demand: An Initial Look



Figure 6(a) illustrates the
effect of an expansion of the in-
S0
dustry from 100,000 farms to
130,000 farms”a rightward S1
shift of the supply curve from
S0S0 to S1S1. Figure 6(b) illus- c




Price per Pound
$7.30
trates the opposite case: a con-
traction of the industry from
100,000 farms to 62,500 farms. f
7.10
The supply curve shifts in-
ward to the left, from S0S0 to
S2S2. Even if no farmers enter
or leave the industry, results S0
like those depicted in Figure 6
S1
can be produced by expansion
or contraction of the existing
Quantity Supplied
farms.
in Millions of Pounds per Year


F I GU R E 5
Technological Progress Another influence that shifts supply curves is technological
Movements along
change. Suppose some enterprising farmer invents a new growth hormone that increases
versus Shifts of a
the body mass of cattle. Thereafter, at any given price, farms will be able to produce more
Supply Curve
beef; that is, the supply curve will shift outward to the right, as in Figure 6(a). This exam-
ple, again, illustrates a general influence that applies to most industries:
Technological progress that reduces costs will shift the supply curve outward to the
right.
Automakers, for example, have been able to reduce production costs since industrial
technology invented robots that can be programmed to work on several different car
models. This technological advance has shifted the supply curve outward.

Prices of Inputs Changes in input prices also shift supply curves. Suppose a drought
raises the price of animal feed. Farmers will have to pay more to keep their cows alive and
healthy and consequently will no longer be able to provide the same quantity of beef at
each possible price. This example illustrates that
Increases in the prices of inputs that suppliers must buy will shift the supply curve in-
ward to the left.

F I GU R E 6
Shifts of the Supply Curve




S2
D
S0
S0
V
S1
Price




Price




E
U

S0 S2

S1 D
S0


Quantity Quantity
(a) (b)




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Licensed to:
Part 1
64 Getting Acquainted with Economics



Prices of Related Outputs Ranchers sell hides as well as meat. If leather prices rise
sharply, ranchers may decide to not to fatten their cattle as much as they used to, before
bringing them to market, thereby reducing the quantity of beef supplied. On a supply-
demand diagram, the supply curve would then shift inward, as in Figure 6(b).
Similar phenomena occur in other industries, and sometimes the effect goes the other
way. For example, suppose that the price of beef goes up, which increases the quantity of
meat supplied. That, in turn, will raise the number of cowhides supplied even if the price
of leather does not change. Thus, a rise in the price of beef will lead to a rightward shift in
the supply curve of leather. In general:
A change in the price of one good produced by a multiproduct industry may be ex-
pected to shift the supply curves of other goods produced by that industry.




SUPPLY AND DEMAND EQUILIBRIUM
To analyze how the free market determines price, we must compare the desires of con-
sumers (demand) with the desires of producers (supply) to see whether the two plans are
consistent. Table 3 and Figure 7 help us do this.
Table 3 brings together the demand schedule from Table 1 and the supply schedule
from Table 2. Similarly, Figure 7 puts the demand curve from Figure 1 and the supply
curve from Figure 4 on a single graph. Such graphs are called supply-demand diagrams,
A supply-demand
diagram graphs the and you will encounter many of them in this book. Notice that, for reasons already dis-
supply and demand curves cussed, the demand curve has a negative slope and the supply curve has a positive slope.
together. It also determines
That is generally true of supply-demand diagrams.
the equilibrium price and
In a free market, price and quantity are determined by the intersection of the supply
quantity.
and demand curves. At only one point in Figure 7, point E, do the supply curve and the
demand curve intersect. At the price corresponding to point E, which is $7.20 per pound,
the quantity supplied and the quantity demanded are both 60 million pounds per year.
This means that at a price of $7.20 per pound, consumers are willing to buy exactly what
producers are willing to sell.
At a lower price, such as $7.00 per pound, only 40 million pounds of beef will
be supplied (point g), whereas 70 million pounds will be demanded (point G).



F I GU R E 7 TA BL E 3
Determination of the Equilibrium Price
Supply-Demand Equilibrium
and Quantity of Beef
D S Price Quantity Quantity Surplus or Price
a
A
$7.50 per Pound Demanded Supplied Shortage Direction
7.40 $7.50 45 90 Surplus Fall
7.40 50 80 Surplus Fall
Price per Pound

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