Download 8.1.1 The Individual Firm`s Supply Curve

CHAPTER 8 STUDY GUIDE
8.1 SUPPLY
1. As we begin our study of supply and demand, it is good to keep in mind that supply
represents producer behavior, and that the supply curve slopes up (supply = producers =
slopes up). Keeping this straight in our minds will be enormously useful as we investigate
supply and demand together on the same graph. Supply = producers = slopes up!
8.1.1 The Individual Firm’s Supply Curve
1. The individual firm supply curve has two parts: (1) the firm’s MC above AVC, and (2) the
vertical axis for all prices below the shutdown point (minimum AVC). The first portion of
the individual firm supply curve is easy to recall, but the vertical portion is often forgotten.
8.1.2 The Market Supply Curve
1. The market supply curve represents “numerous” firms. This is a large number of small firms.
This is good to keep in mind as we work with supply and demand graphs, because the graph
is the same size on the page as the individual firm supply curve. However, the market supply
curve is much larger: each individual firm is so small relative to the market that it cannot
affect the price. So, even though the individual firm supply curve and the market supply
curve appear to be the same size, they are actually much different in meaning, since their
units are very different. We use the labels, “q” and “Q” to signify this difference in
magnitude, a good thing to keep in mind as we move forward in our study of supply and
demand.
8.1.3 The Law of Supply
1. Another key feature of graphs of market supply and demand is that the graphs are “inverse,”
or “backwards.” This simply means that price is the independent variable, but located on the
vertical axis. Price really should be located on the horizontal axis as the independent
variable, but due to tradition, we draw it on the vertical axis. This convention takes some
getting used to, but it becomes simple with a little practice.
8.2 THE ELASTICITY OF SUPPLY
1. Elasticities are unitless, they are measured in percentage terms. This makes elasticities easy
to work with, as they can be compared across commodities.
2. The elasticity of supply is one of the major “take home lessons” of this course. If you can
recall this concept after the course is over, it will provide knowledge and insight into a great
deal of market phenomena and producer behavior. In some cases, supply is responsive to
price (elastic) and in some cases supply is unresponsive to price (inelastic). When thinking
about markets, the price elasticity of supply is a great way to understand and explain what is
going on.
3. The point elasticity of supply is for measuring price responsiveness at a single point, or for
small changes near a single point. The arc elasticity of supply is for discrete changes in price,
from one level to a different level.
© Taylor & Francis 2016
4. The price elasticity of supply is related to, but much different than the slope of the supply
curve. The slope of a supply curve is equal to: Δy/Δx = ΔP/ΔQs. The elasticity, on the other
hand, is equal to the percentage change in Qs divided by the percentage change in P, or: Es =
(ΔQs/ΔP)(P/Qs). Notice that there is a relationship between the slope and the elasticity, but
they are quite distinct from each other. When looking at a graph, we can compare elasticities
if two supply curves are drawn on the same graph. If two supply curves were drawn on two
different graphs, we would have to know more specific quantitative information to be able to
compare elasticities.
8.3 CHANGE IN SUPPLY; CHANGE IN QUANTITY SUPPLIED
1. The first time students are exposed to this, it can appear difficult. As with the other economic
concepts and principles that we have learned, the concept can become quite easy with a little
practice. If a good’s own price changes, this results in a movement along the supply curve,
and is called a change in quantity supplies. If anything else changes, this is a shift in the
supply curve, and is called a change in supply.
8.4.1 Input Prices
1. Prices of agricultural inputs and outputs are volatile, as they depend on the weather and
global supply and demand conditions. Agricultural managers, producers, and agribusinesses
would do well to pay attention to changes in relative prices. When prices change, economic
conditions also change, as do profit-maximization decisions. The business firms that react the
quickest and best to relative price changes will be the most profitable.
8.4.2 Technology
1. The history of agriculture is one of technological change. Technological change makes more
food available by making food less scarce. The continual progress of technological change
places downward pressure on agricultural output prices, since supply is shifting out faster
than demand. This has made food more affordable to the world, and allowed individuals and
families to spend their earnings on goods and services other than food.
© Taylor & Francis 2016