Download Inelastic Supply

Supply and Demand
Supply
Supply


The willingness and ability of potential
sellers to offer various amounts of
goods at various prices at various
times
Businesses supply the goods and
services demanded by households
Law of Supply


The law of supply states that as the
price of a good increases, the quantity
supplied of that good increases.
This is common sense since if an
individual can make more by
producing more then more is
produced.
Increase in Supply

When an important factor
other than the price of a
good itself changes, a
change in the supply of that
good can occur. An
increase in supply means
producers are willing to
supply more of a good at
each price. Graphically, an
increase in supply appears
as a rightward (or upward)
shift of the supply curve.
Decrease in Supply

A decrease in supply
means producers are
not willing to sell as
many units at each
price as before.
Graphically, a
decrease in supply
appears as a leftward
shift of the supply
curve.
Supply Schedule



Table showing
what potential
sellers would
provide various
amounts of product
at a given price
P = price per unit
Q = total amount
P
Q
(in millions)
$1.00
0
$1.50
5
$2.00
10
$2.50
15
$3.00
20
Supply Curve



Graphical
representation of a
supply schedule
Why does the price
per bushel go up the
more bushels that are
ordered?
What happens when
you order more of a
product from the
store?
CHANGE IN QUANTITY SUPPLIED
VS. A CHANGE IN SUPPLY



Make a mental note to connect the words quantity
and price.
A change in price creates a change in the quantity
supplied. This is movement along the supply
curve, it is a positive slope curve and reflects a
direct relationship. When the price goes up the
quantity supplied goes up as well.
A change in supply causes a shift of the entire
supply curve. These changes are caused by
shifters or determinants.
DETERMINANTS OR SHIFTERS
#1 – THE COST OF INPUTS*


An input is something used to produce
the good such as labor or materials.
You know these as the factors of
production.
If the cost of inputs change then the
cost of production and the resultant
profit margin change. When labor cost
goes up and the producer cannot raise
his price, the supply curve shifts left
#2 TECHNOLOGY


When technology improves it creates
greater efficiency and lowers the cost
of production so that the supply curve
shifts right. More can be made without
costing more.
A loss of technological skill or know
how would create inefficiency and shift
the curve to the left.
#3 – NUMBER OF FIRMS


As more firms come into the industry,
the supply curve shifts to the right to
reflect an increase.
As firms leave for various reasons, the
supply curve shifts to the left reflecting
a decrease.
#4 PRICE OF SUBSTITUTE
PRODUCTS


A substitute product is one that can be
produced with the same or nearly the
same set of inputs. When the price of
a substitute product of a good goes up,
the opportunity cost of producing the
good goes up.
This changes the curve as choices
necessitated by scarcity are made.
#5 PRICE OF JOINT
PRODUCTS



Joint products are goods that are almost
always produced together because it is
difficult to produce them separately.
If you cut trees for lumber you also have
wood shavings. Both are products
If the price of the joint product goes up,
the supply goes up and if the price of the
joint product goes down, the supply goes
down.
Price Elasticity of Supply


The proportionality with which the
quantity of a commodity offered for
sale on the market changes in
response to a given change in the
going price
E = (% change in supply X)/(% change
in price of X)
The Arc Elasticity of Supply



The arc elasticity of
supply refers to the
relationship between
changes in price and
the subsequent
change in quantity
supplied.
Qo is the initial
quantity supplied. Q1
is the new quantity
supplied.
Po is the initial price.
P1 is the new price.
The Arc Elasticity of Supply

Firms will increase production if they
believe market prices for the good or
service they produce will increase in
the future, and if they believe such a
price rise will be a permanent change
in the market. (There is no incentive to
increase production and stocks, if
prices are expected to fall again in the
near future).
Elasticity of Supply


In the ''short run'', supply is reasonably
elastic; however labor costs may rise per
unit of production if your work force is paid
penalty rates for night shifts and weekend
shifts.
In the long run, firms have the time to
invest in new capital. In the ''long run'',
supply is at its most elastic, as production
can be increased markedly.



Inelastic supply means E is less than 1
Elastic supply means E is greater than
1
Unit elastic supply means E = 1
Supply Relationship



What would a shift in this curve to the
right mean?
What would a shift in this curve to the
left mean?
What would affect this curve to shift?
Elastic Supply

The diagram to your left
indicates a good which has
an elastic supply curve. An
icecream manufacturer can
rapidly increase production,
if hot weather is forecast.
Sales are likely to increase
by a large amount. The
demand for icecreams
would have to rise by only a
small amount (to P1 from
Po) to justify the large
increase in quantity
supplied. (Q1 less Qo).
Inelastic Supply

The diagram to your left
indicates a good which
has an inelastic supply
curve. It is possible, for
example, to grow
tomatoes all year round.
To grow tomatoes in
winter requires glass
houses, heating, and
supplementary lighting in
the right wave lengths, to
compensate for the shorter
days and longer nights.
However, it can be done;
but at a considerable cost.
Inelastic Supply

The price of tomatoes would have to
rise by a considerable amount (to P1
from Po) to justify the small increase in
quantity supplied. (Q1 less Qo).
Substitution Effect


Is applied when there is a “substitute”
product a person can buy if the price of
a product goes up or if supply runs out.
How does this affect supply? How
does this effect demand? How does
this affect pricing?
Income effect


The price of a good can affect how a
person feels about his or her income.
If it’s too high, a person feels poor,
causing them not to buy the product,
hence lowering demand by for a
certain population.
How does this affect pricing?
Key Results of Shifts in
Demand

An event that increases supply causes
the supply curve to shift outward and
to the right. If the demand curve is not
affected, then the equilibrium price will
decrease and the equilibrium quantity
will go up.
Key Results of Shifts in
Demand

An event that decreases supply
causes the supply curve to shift inward
and to the left. If the demand curve is
not affected, the equilibrium price will
increase and the equilibrium quantity
will go down.
Marginal Utility


Total utility is the
total amount of
satisfaction gained
from consumption
Marginal utility is
the amount gained
every time the
product or service
is consumed
Chocolate
eaten
Marginal
Total
Satisfaction Satisfaction
0
0
0
1
70
70
2
10
80
Chocolate Consumed
Law of Diminishing Returns
5
4
3
2
1
0
Marginal Utility
The Business Cycle

Regular up and down movements in
the economy, usually measured in real
GDP
Peak
GDP
Unemployment
Job rate
Inflation
Expansion
Contraction
Recession
Trough
Depression
Group Work
P
Q
(in millions)
$1.00
0
$1.50
5
$2.00
10
$2.50
15
$3.00
20