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Understanding Supply Concepts: Theory, Function, and Elasticities

This comprehensive overview delves into the fundamental concepts of supply in economics. It covers the theoretical assumptions underlying supply functions, including price elasticity and empirical examples. Detailed discussions on supply shifters such as technology, input prices, opportunity costs, and government policies are included. The text also explains the market supply function, the concept of maximum profit, and various forms of price expectations—naïve, adaptive, and rational. The impact of structural change and random events on supply is examined, along with the definition and factors affecting price elasticity of supply.

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Understanding Supply Concepts: Theory, Function, and Elasticities

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Presentation Transcript

  1. C5 -Supply Concepts: • Basic Concepts: theory • Assumptions • Shifters of Supply • Price Elasticities of Supply • Empirical examples

  2. The Supply Function • Definition • Assumptions • Technology - • Prices of inputs/output • known • fixed (price taker) • Maximize profit (MR=MC) • Theoretical link to MC • Shape - parameters

  3. Price Expectations • Output price risk • lag between production decision and harvest • forward contract • government program • Price expectations • Naïve expectations (Ezekiel 1938) • Adaptive expectations (Nerlov 1958) • Rational expectations (Muth, 1961) • Market supply function

  4. Supply Shifters • Technological change • input prices • Opportunity costs • other output prices • returns to fixed factors (land) • Structural change • Economies of size • Random events • Government policies • quotas • input constraints

  5. Price Elasticity of Supply • Definition • Factors that affect elasticity • substitutability (constraints) • length of adjustment period • short run - long run • U-shaped • aggregate goods more inelastic (asset fixity) • Empirical estimates

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