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Chapter 5 - Supply What is Supply? Law of Supply Determinants of Supply Change in Supply v. Quantity Supplied Elasticity of Supply Equilibrium: Supply = Demand DEFINITION: Supply: a schedule or curve shows the relationship between price and quantity: the quantity producers are willing to supply at each of a series of prices Law of Supply: As price increases, quantity supplied increases. Assumption: competitive industry Direct relationship between price & quantity Results in an upward sloping curve Supply Curve: Case Study: Sport Socks Case Study: Answer #1 Case Study: Sport Socks Case Study: Sport Socks Determinants of Supply: Supply Shifters: Technology 1. Improvements in technology = increased supply Increased efficiency = increased supply Number of Sellers 2. New firms, imports = increased supply Change in Costs 3. Change in resource prices (higher costs = decreased supply) Taxes / subsidies Determinants of Supply (cont’d): Supply Shifters: Weather/Environment 4. Certain industries, eg. agriculture, tourism Natural disasters, eg. Katrina destoroying production facilities Suppliers’ Expectations 5. Expectations of future price changes affect supply If future prices expected to rise, producers may produce more Change in Supply: Change in Supply: Change in Supply: Supply v. Quantity Supplied: Change in Supply: Caused by a change in one or more determinants of supply Shifts entire supply curve Change in Quantity Supplied: Caused by change in price Movement from one point to another along an existing supply curve DEFINITION: Elasticity of Supply: • A measure of how much quantity supplied changes in response to a change in price. Elastic Supply: • • • • If a given change in Price causes suppliers to make relatively large changes in Quantity Supplied, supply is elastic. Suppliers can easily adjust output Additional resources (labour, capital, natural resources) are available Elasticity of supply tends to increase over time Inelastic Supply: • • • • • If a given change in Price causes suppliers to make only small changes in Quantity Supplied, supply is inelastic. Suppliers cannot easily adjust output Additional resources (labour, capital, natural resources) are unavailable Suppliers face rising costs Supply is most inelastic in the short run Price Elasticity of Supply: A measure of the responsiveness of suppliers to a change in price. If Es is greater than 1, demand is elastic If Es is less than 1, demand is inelastic If Es is = 1, demand is unitary Price Elasticity of Supply: CALCULATING COEFFICIENT OF ELASTICITY: Es = % change in Q % change in P % change in Q = Q2–Q1 (Q2+Q1)/2 % change in P = P2–P1 (P2+P1)/2 Case Study: Sport Socks Calculate the coefficient of elasticity from: a) $6 to $7 b) $5 to $4 Case Study: Answer Coefficient of elasticity from: a) $6 to $7: % change in P = P2–P1 (P2+P1)/2 = 7–6 = 1/6.5 = .15 (7+6)/2 % change in Q = Q2–Q1 (Q2+Q1)/2 = Es = % change in Q % change in P b) $5 to $4: Es = .08/.22=.36 16k-15k =1k/15.5k=.06 (16k+15k)/2 Es = Q =.06/.15=.43 P Equilibrium Price: Equilibrium Price: