David K.H. Begg, Gianluigi Vernasca-Economics-McGraw Hill Higher Education (2011)

3 .6 Behind the supply curve
where Qt is the quantity of mobile voice calls made in period t, Pt is the price of mobile voice calls per minute
in period t, Yr is the consumers' income (measured as disposable income per head) in period t, PFC1 is the
price of fixed voice calls per minute in period t, PSMS1 is the price of SMS (short message service) in period
t and T denotes a time trend (T = 1 in the third quarter of 1999 represents the first observation; T = 2 in the
fourth quarter of 1999 represents the second observation, and so on).
From equation ( 1) we can see some interesting results. An increase in the price of mobile voice calls (everything
else equal) decreases the quantity of mobile calls made as we should expect from market demand. An increase
in the income of consumers (everything else equal) will increase the quantity of mobile calls made, implying
that mobile voice calls are a normal good.
From equation ( 1) we can also obtain the usual demand curve that relates quantity and price, other things
equal, in a given period of time. Suppose that in the second quarter of 2005, the level of consumers' income
was £2000, the price of fixed voice calls was 1 Op, the price of SMS was Sp and the time trend was 24. Using
those numbers in equation (1) we obtain the demand curve for the second quarter of 2005:
Q200 5 q2 = 2795.2 - l.03P200 5 q2 (2)
A word of caution about the estimated demand in (1): econometrics uses statistical techniques to estimate
a relationship between variables using data. Therefore equation ( 1) is not the exact market demand and the
predictions we obtain from it may not be totally reliable.
Source: Adapted from Alpetkin, A. et al. (2007) Estimating spectrum demand for the cellular services in the UK, working paper, University
of Surrey.
B_ e _ h i_nd_t_ h _ e s_ u _ PP _ly_c_ u r_ve
--
____________________
At low prices, only the most efficient chocolate producers make profits. As prices rise, producers previously
unable to compete can now make a profit in the chocolate business and wish to supply. Moreover, previously
existing firms may be able to expand output by working overtime, or buying fancy equipment unjustified
when selling chocolate at lower prices. In general, higher prices are needed to induce firms to produce
more chocolate. Other things equal, supply curves slope up as we move to the right.
Just as we studied the 'other things equal' along a demand curve, we now examine three categories of 'other
things equal' along a supply curve: the technology available to producers, the cost of inputs (labour,
machines, fuel, raw materials) and government regulation. Along a particular supply curve, all of these are
held constant. A change in any of these categories shifts the supply curve, changing the amount producers
wish to supply at each price.
Technology
A supply curve is drawn for a given technology. Better technology shifts the supply curve to the right.
Producers supply more than previously at each price. Better cocoa refining reduces the cost of making
chocolate. Faster shipping and better refrigeration lead to less wastage in spoiled cocoa beans. Technological
advance enables firms to supply more at each price.
As a determinant of supply, technology must be interpreted broadly. It embraces all know-how about
production methods, not merely the state of available machinery. In agriculture, the development of
disease-resistant seeds is a technological advance. Improved weather forecasting might enable better
timing of planting and harvesting. A technological advance is any idea that allows more output from the
51