Elasticity of SupplyElasticity of Supply

•Changes in the price offered by Changes in the price offered by the market will affect the amount the market will affect the amount of goods produced by businessesof goods produced by businesses

•The degree to which a product’s The degree to which a product’s supply is impacted by price is supply is impacted by price is called the called the elasticity of supplyelasticity of supply

•If the price that consumers are If the price that consumers are offering for a product goes up- offering for a product goes up- the producers would be foolish the producers would be foolish not to make morenot to make more

•Big question is Can They Make Big question is Can They Make More? More? Ease of ProductionEase of Production

•A factory makes tie dyed T shirtsA factory makes tie dyed T shirts•They respond to higher prices by They respond to higher prices by

a massive increase in productiona massive increase in production•The shirts are cheap and easy to The shirts are cheap and easy to

makemake•They have an They have an elastic supplyelastic supply

•On the other hand- let’s look On the other hand- let’s look at the Boeing 777at the Boeing 777

•A third world dictator wishes A third world dictator wishes to pay double the sticker to pay double the sticker price to build an airline for his price to build an airline for his countrycountry

•He is angered to learn that He is angered to learn that Boeing turns down his offer to Boeing turns down his offer to buy twenty planes at $300 buy twenty planes at $300 million each- especially since million each- especially since they only cost $150 million to they only cost $150 million to begin withbegin with

•Remember ease of production? Remember ease of production? Jets are not something you Jets are not something you whip up during an all nighterwhip up during an all nighter

•They are massive pieces of They are massive pieces of intricate machinery and intricate machinery and technologytechnology

•No matter what you offer- No matter what you offer- Boeing simply cannot make Boeing simply cannot make an abundance of the planesan abundance of the planes

•Quantity cannot stretch Quantity cannot stretch much- economists refer to a much- economists refer to a product like jets as having an product like jets as having an inelastic supplyinelastic supply

•What are some other What are some other products that are inelastic in products that are inelastic in supply?supply?

InelasticInelastic

•Powerplant/linesPowerplant/lines•HouseHouse•Shopping mallsShopping malls

Supply Curves Move When Supply Curves Move When Supply Increases or DecreasesSupply Increases or Decreases•Even if price remains constant- Even if price remains constant-

other factors many force other factors many force supply to increase or decreasesupply to increase or decrease

•Businesses are often faced Businesses are often faced with many obstacles in getting with many obstacles in getting products to the marketplaceproducts to the marketplace

•The factors are called The factors are called determinants of supplydeterminants of supply

•Technological improvementTechnological improvement•Resource pricesResource prices•Taxes and subsidiesTaxes and subsidies•CompetitionCompetition

Technological ImprovementTechnological Improvement

•If Ford buys new robots to If Ford buys new robots to work in its factories, work in its factories, productivity will increaseproductivity will increase

•More Fords will hit the More Fords will hit the marketplace even if prices marketplace even if prices have remained constanthave remained constant

Resource PricesResource Prices•The price of resources or factors The price of resources or factors

usually refers to anything needed to usually refers to anything needed to make a product or provide a servicemake a product or provide a service

•If a steel shortage causes If a steel shortage causes production problems at Caterpillar- production problems at Caterpillar- the amount of tractors the company the amount of tractors the company will be able to make may decreasewill be able to make may decrease

Taxes and subsidiesTaxes and subsidies•Subsidy: monetary grant to a Subsidy: monetary grant to a

business to help ease production or business to help ease production or develop a new productdevelop a new product

•Taxes add to production costs and Taxes add to production costs and will result in lower supplies at a given will result in lower supplies at a given priceprice

•If more money is coming in the form If more money is coming in the form of subsidy, costs will decrease and of subsidy, costs will decrease and result in higher suppliesresult in higher supplies

CompetitionCompetition•When in-line skates started to When in-line skates started to

become popular, there were only become popular, there were only a few companies in the fielda few companies in the field

•As the popularity became As the popularity became evident to business people, more evident to business people, more producers entered the marketproducers entered the market

•Prices remained competitive, but Prices remained competitive, but the supplies and choices of in the supplies and choices of in line skates swelledline skates swelled

•The product is Boeing 777s. The product is Boeing 777s. For each of the four For each of the four determinants of supply, think determinants of supply, think of a situation that would of a situation that would increase the supply of planesincrease the supply of planes

Supply and Demand Meet!!Supply and Demand Meet!!•The price system is the means by The price system is the means by

which the price of a good or which the price of a good or service is determined in a pure service is determined in a pure market economymarket economy

•When a business produces When a business produces something, it hopes to find a something, it hopes to find a customer, retrieve the money customer, retrieve the money spent in productions, and make a spent in productions, and make a profitprofit

•When a business approaches When a business approaches the marketplace- it posts a the marketplace- it posts a price that says to customers price that says to customers “If you want my product you “If you want my product you will have to give me this will have to give me this much”much”

•Customers also approach the Customers also approach the market with something to saymarket with something to say

•If they choose to buy, they confirm If they choose to buy, they confirm to the business that they consider to the business that they consider the price fairthe price fair

•If they pass, the producer is being If they pass, the producer is being told that the price is not told that the price is not acceptableacceptable

•The business will respond by The business will respond by lowering prices until people lowering prices until people start to buystart to buy

•Price is determined Price is determined graphically where the supply graphically where the supply and demand curves meetand demand curves meet

•This point is often called This point is often called equilibriumequilibrium

•It occurs when the supply for It occurs when the supply for a product matches the a product matches the demand for a productdemand for a product

•What is the current What is the current equilibrium price of gasoline?equilibrium price of gasoline?