Download Determinants of Supply

Determinants of Supply
IB Economics
The Law of Supply
• Supply is the quantity of a product that a producer
is willing and able to supply onto the market at a
given price over a given time period
• The basic law of supply is that as the market
price of a commodity rises, so producers expand
their supply onto the market as the higher price
makes it more profitable to do so
The Supply Curve
Price
Supply
P2
P1
P3
Q3
Q1
Q2
Quantity
A Shift in the Supply Curve
• A change in price level causes a movement along
the supply curve but a change in any factor other
than price causes the whole supply curve to shift.
An outward shift/increase in the Supply
Price
S1
S2
P1
Q1
Q2
Quantity
An inward shift/decrease in the Supply
Price
S3
S1
S2
P1
Q3
Q1
Q2
Quantity
Causes of shifts in market supply
• Changes in production costs – an increase in the costs of
production lowers profitability and therefore reduces
supply. Costs of Production include:
– Wage costs
– Raw materials and components
– Energy costs
• Government taxes and subsidies
– A tax increases the costs of production, lowers profitability and
therefore lowers supply.
– A subsidy is a sum of money given by the government to
producers and therefore lowers the costs of production and
increases supply as it increases profitability.
Causes of shifts in market supply
• Changes in Technology
– New technology can speed up the production process
and reduce the costs of production making it more
profitable and therefore will increase the supply.
• Natural factors
– The weather and natural disasters can affect supply.
Bad weather can reduce the supply of agricultural
products.
Price Elasticity of Supply
Price Elasticity of Supply measures the
responsiveness of quantity supplied to a change in
price
PES = % Change in Qs
% Change in P
Range of Values:
Perfectly Inelastic 0
Inelastic 0 < x < 1
Unitary Elastic 1
Elastic 1 < x < ∞
Perfectly Elastic ∞
Elasticity of Supply
• Explain and illustrate each of the different values
of PES
• Complete the questions on the determinants of
PES (Small Cars and Roses)
Price Elasticity of Supply
• Availability of Stocks of Finished Products and Raw
Materials - If a firm has stocks of finished products they
can be released to the market quickly following an
increase in demand. In addition stocks of raw materials
allow a firm to produce products more quick. The
availability of stocks makes the supply elastic
Price Elasticity of Supply
• Time – some products take a long time to
produce and/or grow and therefore in the shortrun the supply is inelastic
• Possibility of Switching Resources from one
use to another – If a firm produces a number of
products and the demand for one product rises
then the firm is able to expand it’s output by
switching resources from another use.
Price Elasticity of Supply
• Spare Capacity – a firm is said to have spare
capacity when it is not using all of it’s available
resources fully. So if the machines are not
running for example 24 hours a day and the
labour is not all working full time then spare
capacity exists and it is possible to increase
output quickly by using these resources fully.
Questions
• Calculate PES in each of the following cases:
– An increase in price of 30% leads to an increase in quantity
supplied of 50%;
– A decrease in price leads to an equal percentage change in
quantity supplied;
– An increase in price leads to no change in quantity supplied.
• Explain and illustrate the difference between price
elastic and price inelastic supply.
• Explain why the supply of agricultural products is
more inelastic than that of cars.
Joint Supply
• Two products are in joint supply when a rise in the
output of one product leads to a rise in the supply
of the other product
Diagram to show joint supply
Two products are in joint supply when a rise in the output of one product leads
to a rise in the supply of the other product
S Beef
Price
Price
S Beef hide
P2
S1
P3
P1
D1
P4
D
D
Q1
Q2
Quantity bought and sold
Qa
Qb
Qc
Quantity bought and sold