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Supply
I.
Basics
A.
Definition: the
amount of a product
that is offered for
sale at all possible
prices that exist in
the market
B.
Law of Supply:
Price and supply
have a direct
relationship so that
when price
increases, more of a
product is offered
for sale.
C.
When price drops,
less is offered at the
lower prices
D. This creates an upward sloping
supply curve
This is referred to as a change
in the quantity supplied
What’s the Law of Supply say?
P
S
$10
The change
in price
Which causes movement
ALONG the supply curve
$5
0
15
25
Q
Causes the change in the quantities supplied
E. Creating a supply curve from a supply
schedule
P
QS
P
S
$10
20
7
10
3
2
$10
7
3
2
10
20
Task
Using the supply schedule below,
construct a supply curve
P
$45
Q
P
S
$45
150
32
32
75
20
62
20
62
75
150
Q
Why producers supply more product at higher
prices:
II.
A.
Businesses want to take advantage of higher
prices, so they increase supply
B.
As prices rise, more firms enter the market to take
advantage of the higher profits than in other
industries
C.
Increases in demand cause prices to rise, which
signals an increase in supply to meet the
increased demand
D.
To supply more, more must be produced. To
produce more, the supplier must buy more
resources to increase production. His costs of
production therefore increase. Businesses can
sometimes ONLY increase production when
product prices increase to offset their increased
cost (deeper oil reserves under harder rock)
Changes/shifts in Supply
III.
A.
Reasons other than price for changes in
the amount producers supply (most having
to do with changes in production costs)
New position
P
Price
doesn’t
change
S1
S2
$5
What factors cause
the shift?
Q
B. Almost all the factors have to do with
costs of production
1. If production costs are low, profits are
higher, so more product will be supplied
2. If costs are higher, profits are lower, and
less will be supplied
Example:
Either way,
Two ways to increase profits
Widgets
Increase price
Or, decrease costs
Widget price:
$3
$3.50
$3.00
Per widget cost:
$2
$2.00
$1.50
Per widget profit:
$1
$1.50
$1.50
the higher
profits will
motivate
producers
to supply
more to the
market
C. Reasons for changes in supply (or shifts
in the supply curve)

Changes in:
1.
the cost of inputs
2.
productivity
3.
technology
4.
taxes
5.
subsidies
i.
government
payments for which
it receives nothing –
welfare payments,
social security etc.
6.
expectations of future
prices
7.
government
regulations
8.
number of sellers
Create supply curves showing the
change in supply for the following:
1.
2.
3.
4.
5.
Supply of furniture when lumber becomes
more expensive
Supply of corn when the govt reduces farm
subsidies
Supply of TVs when it’s expected that TV
prices will decrease starting next month
Supply of peanut butter when peanut
harvesters go on strike
Supply of a product after manufacturing is
computerized
IV. Elasticity of Supply
A. The more time it takes to respond to the
higher prices and increase supply, the
more inelastic the supply will be
B. The quicker a company can respond to the
price signal to increase supply, the more
elastic
C. Determinants of supply elasticity have to do
with time
1.
2.
3.
4.
Large amount of capital If the increased production
requires the use of any of
Use of technology
these, supply will be inelastic
Skilled labor required
Simply takes a while (time) If none of these is required,
supply will be elastic
1.
Large amounts of capital

e.g.: coal mining
Huge amounts of land
Some coal mines can simply work a few
tothe
locate and purchase
Increased supply  large amount of time in
hours longer or dig weekends too. So
short run. Supply elasticity = highly inelastic
some increase will occur. But beyond that,
new heavy industrial machinery must be
purchased and shipped, new workers trained,
and mining operations expanded or new
locations found, purchased, and cleared
just to begin mining. Thus, a relatively
smaller increase in QS in the short run will occur
but the long run increase in quantities supplied
will be extremely inelastic
The relatively smaller change
Capital
intensive
in quantities
supplied
is due to the
amount of time needed to increase supplies.
2. Use of technology
a. Purchase, shipment, setup and integration into
current manufacturing system, hiring and training
on the new machinery will take time
3. Skilled labor
1. Time needed for the training
Other products are just so massive in scale, to increase quantities supplied takes years … or more
4. Other time issues
S
So why is there any increased quantities supplied?
Determinants of Supply Elastic City Chart
To increase supply requires …
Large amounts
of capital
The use of
technology
Yes
Inelastic
No
Yes
Elastic
Inelastic
No
Yes
Elastic
Inelastic
No
Yes
Elastic
Inelastic
No
Elastic
Skilled labor
Significant
amount of time
Elastic Supply
P
S
Q
P
S
Inelastic Supply
Q
P
S
Unit elastic Supply
Q
How can you know for certain the
elasticity of supply?
V.
A.
Nope!
Questions
Define the Law of Supply.
Create a supply curve reflecting the Law of Supply.
Why do producers supply products at greater
quantities when prices increase?
4. What are the factors that cause an increase in supply
(not in quantities supplied)?
5. Create a supply curve showing a change in supply for
shirts when the cost of cotton increases.
6. Create a supply curve for vacuums when 20% of
vacuum plant workers are replaced with automated
machinery.
7. List the determinants of supply elasticity.
8. What’s the supply elasticity for airplanes? Why?
9. What’s the supply elasticity for orange juice? Why?
10. What’s the supply elasticity for socks? Why?
1.
2.
3.