Transcript Supply

Chapter 5 - Supply
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What is Supply?
Law of Supply
Determinants of Supply
Change in Supply v. Quantity Supplied
Elasticity of Supply
Equilibrium: Supply = Demand
DEFINITION:
Supply:
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a schedule or curve
shows the relationship between price and
quantity:
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the quantity producers are willing to supply
at each of a series of prices
Law of Supply:
As price increases,
quantity supplied increases.
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Assumption: competitive industry
Direct relationship between price & quantity
Results in an upward sloping curve
Supply Curve:
Case Study: Sport Socks
Case Study: Answer #1
Case Study: Sport Socks
Case Study: Sport Socks
Determinants of Supply:
Supply Shifters:
Technology
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Improvements in technology = increased supply
Increased efficiency = increased supply
Number of Sellers
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New firms, imports = increased supply
Change in Costs
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Change in resource prices (higher costs = decreased
supply)
Taxes / subsidies
Determinants of Supply (cont’d):
Supply Shifters:
Weather/Environment
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Certain industries, eg. agriculture, tourism
Natural disasters, eg. Katrina destoroying production
facilities
Suppliers’ Expectations
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Expectations of future price changes affect supply
If future prices expected to rise, producers may
produce more
Change in Supply:
Change in Supply:
Change in Supply:
Supply v. Quantity Supplied:
Change in Supply:
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Caused by a change in one or more determinants of
supply
Shifts entire supply curve
Change in Quantity Supplied:
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Caused by change in price
Movement from one point to another along an existing
supply curve
DEFINITION:
Elasticity of Supply:
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A measure of how much quantity supplied changes
in response to a change in price.
Elastic Supply:
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If a given change in Price causes suppliers to make
relatively large changes in Quantity Supplied,
supply is elastic.
Suppliers can easily adjust output
Additional resources (labour, capital, natural resources)
are available
Elasticity of supply tends to increase over time
Inelastic Supply:
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If a given change in Price causes suppliers to make
only small changes in Quantity Supplied,
supply is inelastic.
Suppliers cannot easily adjust output
Additional resources (labour, capital, natural resources)
are unavailable
Suppliers face rising costs
Supply is most inelastic in the short run
Price Elasticity of Supply:
A measure of the responsiveness of suppliers to
a change in price.
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If Es is greater than 1, demand is elastic
If Es is less than 1, demand is inelastic
If Es is = 1, demand is unitary
Price Elasticity of Supply:
CALCULATING COEFFICIENT OF ELASTICITY:
Es = % change in Q
% change in P
% change in Q = Q2–Q1
(Q2+Q1)/2
% change in P = P2–P1
(P2+P1)/2
Case Study: Sport Socks
Calculate the coefficient of elasticity from:
a) $6 to $7
b) $5 to $4
Case Study: Answer
Coefficient of elasticity from:
a) $6 to $7:
% change in P = P2–P1
(P2+P1)/2
= 7–6
= 1/6.5 = .15
(7+6)/2
% change in Q = Q2–Q1
(Q2+Q1)/2
=
Es = % change in Q
% change in P
b) $5 to $4: Es = .08/.22=.36
16k-15k =1k/15.5k=.06
(16k+15k)/2
Es = Q =.06/.15=.43
P
Equilibrium Price:
Equilibrium Price: