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Supply & Elasticity of Supply

Explore the concepts of supply and elasticity of supply, key factors that drive market prices and quantities. Learn to calculate supply equation values and interpret supply elasticity, discussing the effects on markets in various scenarios.

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Supply & Elasticity of Supply

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  1. Supply & Elasticity of Supply AG BM 102

  2. Introduction • Supply is the counterpart of demand • It also is a schedule of prices and quantities • Supply is driven by different factors • Together Supply & Demand determine the market prices and quantities

  3. Supply - A schedule of the quantities of product that producers will sell at various prices

  4. An Example – Beef Supply

  5. Some Ideas • Time period important • Short time – little adjustment possible • Long time – lots of adjustment possible • Medium – moderate adjustment possible • Orchard

  6. Upward sloping • Higher prices induce more production • Higher prices induce entry • Higher prices mean more profit

  7. Calculate Equation

  8. Values

  9. Check to see if points are on line • P = 4, Q = 30 + 10 (4) = 70 • P = 5, Q = 30 + 10 (5) = 80

  10. Elasticity of Supply-The percentage change in quantity supplied in response to a one percent change in price

  11. Calculate Elasticity of Supply

  12. Interpretation • Inelastic supply – between zero and 1 • Elastic supply – greater than 1 • Unitary elasticity - equal to 1

  13. Discussion of Supply Elasticity • Short run vs. long run • Plant products vs. animal products • Ag vs. non- ag (e.g., clothing) • Perishable vs. storable

  14. Change in Supply or Quantity Supplied • Effect on beef market if feed price rises • Effect on beef market if chicken price falls • Effect on beef market if consumer income rises • Effect on beef market if hard winter kills a lot of cattle

  15. Concluding Comments • Understanding supply goes a long way toward understanding markets • Two parts- mechanical part & intuitive part • Second is more important • Think about what will suppliers do? • How fast can they adjust? • What holds them back?

  16. Same lists for demand • Intuition important • Comes from thinking systematically • What will demander do? • How fast will demander change? • Is habit an issue here? • Lots of variables, but most not important • Key is to know which is which

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