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Understanding Supply: Key Concepts, Law of Supply, and Supply Elasticity

This chapter explores the fundamentals of supply in economics, defining supply as the amount of a product available for sale at varying prices. It covers the Law of Supply, demonstrating that as prices increase, the quantity supplied also rises. The chapter illustrates supply schedules and curves, highlighting how shifts in supply result from factors like input costs, productivity, technology, and government regulations. Additionally, it discusses the elasticity of supply, emphasizing responsiveness to price changes and its determinants, crucial for understanding market dynamics.

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Understanding Supply: Key Concepts, Law of Supply, and Supply Elasticity

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Presentation Transcript

  1. Chapter 5.1/5.3/5.4 Supply

  2. 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

  3. 1. An increase in price ... 2. ... increases quantity of cones supplied. Figure 5 Ben’s Supply Schedule and Supply Curve Price of Ice-Cream Cone $3.00 2.50 2.00 1.50 1.00 0.50 Quantity of 0 1 2 3 4 5 6 7 8 9 10 11 12 Ice-Cream Cones

  4. Individual vs. Market S curve • Individual = one producer • Market = Q’s offered at various prices by ALL firms offering the same product

  5. 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

  6. $3.00 0 Change in Quantity Supplied Price of Ice-Cream Cone S C A rise in the price of ice cream cones results in a movement along the supply curve. A 1.00 Quantity of Ice-Cream Cones 0 1 5

  7. 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

  8. Supply curve, S 3 Supply curve, S 1 Supply curve, S Decrease 2 in supply Increase in supply 0 Figure 7 Shifts in the Supply Curve Price of Ice-Cream Cone Quantity of 0 Ice-Cream Cones

  9. 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

  10. 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

  11. 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

  12. 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

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