Chapter 5 - Supply

What is Supply? Law of Supply Determinants of Supply Change in Supply v. Quantity Supplied Elasticity of Supply Equilibrium: Supply = Demand

DEFINITION:

Supply:

a schedule or curve shows the relationship between price and

quantity: the quantity producers are willing to supply at each of a series of prices

Law of Supply:

As price increases, quantity supplied increases.

Assumption: competitive industry Direct relationship between price & quantity Results in an upward sloping curve

Supply Curve:

Case Study: Sport Socks

Case Study: Answer #1

Case Study: Sport Socks

Case Study: Sport Socks

Determinants of Supply:Supply Shifters:

1. Technology Improvements in technology = increased supply Increased efficiency = increased supply

2. Number of Sellers New firms, imports = increased supply

3. Change in Costs Change in resource prices (higher costs = decreased

supply) Taxes / subsidies

Determinants of Supply (cont’d):Supply Shifters:

4. Weather/Environment Certain industries, eg. agriculture, tourism Natural disasters, eg. Katrina destoroying production

facilities

5. Suppliers’ Expectations Expectations of future price changes affect supply If future prices expected to rise, producers may

produce more

Change in Supply:

Change in Supply:

Change in Supply:

Supply v. Quantity Supplied:

Change in Supply: Caused by a change in one or more determinants of

supply Shifts entire supply curve

Change in Quantity Supplied: Caused by change in price Movement from one point to another along an existing

supply curve

DEFINITION:

Elasticity of Supply:

• A measure of how much quantity supplied changes in response to a change in price.

Elastic Supply:

• If a given change in Price causes suppliers to makerelatively large changes in Quantity Supplied, supply is elastic.

• Suppliers can easily adjust output• Additional resources (labour, capital, natural resources)

are available• Elasticity of supply tends to increase over time

Inelastic Supply:

• If a given change in Price causes suppliers to makeonly small changes in Quantity Supplied, supply is inelastic.

• Suppliers cannot easily adjust output• Additional resources (labour, capital, natural resources)

are unavailable• Suppliers face rising costs• Supply is most inelastic in the short run

Price Elasticity of Supply:

A measure of the responsiveness of suppliers to a change in price.

If Es is greater than 1, demand is elastic

If Es is less than 1, demand is inelastic

If Es is = 1, demand is unitary

Price Elasticity of Supply:

CALCULATING COEFFICIENT OF ELASTICITY:

Es = % change in Q

% change in P

% change in Q = Q2–Q1 (Q2+Q1)/2

% change in P = P2–P1 (P2+P1)/2

Case Study: Sport Socks

Calculate the coefficient of elasticity from:a) $6 to $7b) $5 to $4

Case Study: AnswerCoefficient of elasticity from:

a) $6 to $7:

% change in P = P2–P1 (P2+P1)/2

% change in Q = Q2–Q1 (Q2+Q1)/2

Es = % change in Q % change in P

b) $5 to $4: Es = .08/.22=.36

= 7–6 = 1/6.5 = .15 (7+6)/2

= 16k-15k =1k/15.5k=.06 (16k+15k)/2

Es = Q =.06/.15=.43 P

Equilibrium Price:

Equilibrium Price: