Chapter 5.1/5.3/5.4

Supply

Intro to Supply

• Supply – the amount of a product offered for sale at all possible prices

• Law of Supply – as P goes up, Qs will go up; or that suppliers usually offer more for sale at higher prices

• Supply schedule – lists various Q’s of a product supplied at all possible P’s

• Supply Curve – graph of the same

Figure 5 Ben’s Supply Schedule and Supply Curve

Price ofIce-Cream

Cone

0

2.50

2.00

1.50

1.00

1 2 3 4 5 6 7 8 9 10 11 Quantity ofIce-Cream Cones

$3.00

12

0.50

1. Anincrease in price ...

2. ... increases quantity of cones supplied.

Individual vs. Market S curve

• Individual = one producer• Market = Q’s offered at various prices by

ALL firms offering the same product

Change in Qs

• Change in Qs is the change in amount offered for sale in response to a change in price

• Represented by movement along the S curve

1 5

Price of Ice-Cream Cone

Quantity of Ice-Cream Cones0

S

1.00 A

C$3.00 A rise in the price

of ice cream cones results in a movement along the supply curve.

Change in Quantity Supplied

Change in Supply

• When suppliers offer different amounts of a products at all prices

• Represented by a shift in the S curve – Increase - right Decrease – left

Figure 7 Shifts in the Supply CurvePrice of

Ice-CreamCone

Quantity ofIce-Cream Cones

0

Increasein supply

Decreasein supply

Supply curve, S3

curve, Supply

S1 Supplycurve, S2

Reasons for Change in Supply

• Cost of Inputs – if P of an input goes down, S increases

• Productivity – if working more efficiently, S can increase

• Technology – new technology usually increases S

• Taxes/Subsidies – increase in taxes would decrease S; adding subsidies can increase S

Cont’d

• Expectations – If producers think the P of their product will go up in the future, they may withhold some S now

• Gov’t Regulations – more regulations usually mean a decrease in S

• # of sellers – If more producers enter market, S increases

Elasticity of Supply

• Measures how responsive the Qs is to a change in price based on the producers

• Elastic – Change in Qs is larger than change in P (in%)

• Inelastic – Change in Qs is smaller than change in P (in%)

• Unit Elastic – change in Qs and Change in P are the same proportion

Determinants of S Elasticity

• All depends on how quickly a firm can adjust to new prices

• If the production process is very complicated, then S is usually inelastic

• Supply tends to be more elastic in the long run because firms can adjust more over time