Transcript Supply & Elasticity of Supply

Supply & Elasticity of Supply
AG BM 102
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
Supply - A schedule of the
quantities of product that
producers will sell at various
prices
An Example – Beef Supply
Price
Quantity
Price
Quantity
3.00
60
4.25
72.5
3.25
62.5
4.50
75
3.50
65
4.75
77.5
3.75
67.5
5.00
80
4.00
70
5.25
82.5
Some Ideas
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•
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Time period important
Short time – little adjustment possible
Long time – lots of adjustment possible
Medium – moderate adjustment possible
Orchard
Important Points
• This assumes other determinants of
supply are fixed
• Input prices
• Technology
• If they change the line moves
Upward sloping
• Higher prices induce more production
• Higher prices induce entry
• Higher prices mean more profit
Calculate Equation
Q  a  bP
b  (Q1  Q2) / ( P1  P 2)
a  Q1  bP1
Values
Q1  70lbs., P1  $4.00, Q2  80lbs. and
b  (70  80) / (4  5)  10
a  70  (10) 4  30
Q  30  10 P
P 2  $5.00
Check to see if points
are on line
• P = 4, Q = 30 + 10 (4) = 70
• P = 5, Q = 30 + 10 (5) = 80
Elasticity of SupplyThe percentage change in
quantity supplied in response to
a one percent change in price
Calculate Elasticity of Supply
  (Q  Q1) / ( P  P1) * ( P1) / (Q1)  b( P / Q )
2
2
1
1
  b( P / Q )  (10)(4 / 70)  (4 / 7)  0.57
1
1
Interpretation
• Inelastic supply – between zero and 1
• Elastic supply – greater than 1
• Unitary elasticity - equal to 1
Discussion of Supply Elasticity
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Short run vs. long run
Plant products vs. animal products
Ag vs. non- ag (e.g., clothing)
Perishable vs. storable
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
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?
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