Supply What producers are willing and able to sell at various prices The concepts that apply to consumers also apply to producers Supply Schedule Supply Curve Market Supply Ceteris paribus

Law of Supply The quantity supplied increases as price increases When prices increase, producers can maximize their profits by selling more The quantity supplied decreases as price decreases If prices fall, producers will likely cut production to minimize losses

Law of Supply Supply is a direct relationship (Remember a demand graph shows an inverse relationship.) As price increases, supply increases As price decreases, supply decreases

Law of Supply: Market Entries & Exits The law of supply is partly explained by market entries & exits Let’s look at housing: If the prices for housing is growing in Pearland, new builders might come here to sell more houses and maximize profits. Therefore, the supply of houses in Pearland would increase along with the prices.

Moving Along the Supply Curve Producers react in predictable ways to changes in price Producers supply more at higher prices and less at lower prices- this is called “moving along the supply curve” or a change in the quantity supplied. Like demand, the only thing taken into account is PRICE when moving along the curve.

Other factors can cause a supply curve to SHIFT. This is called a change in supply. (as opposed to a change in quantity supplied) Shifts can be caused by: The cost of inputs Number of producers Conditions due to disasters Technology Producer expectations Government policy

Supply Elasticity Measure of the sensitivity of producers to a change in price As prices rise, producers are motivated to increase production to increase revenue A producer with elastic supply will respond to an increase in price by increasing supply In other words, when price is elastic, a small increase in price has a big effect on supply.

Example: Antiques & Newspapers Producers cannot simply “make” more antiques Antique supply is inelastic It’ fairly easy to simply print more newspapers Their supply is elastic

Elasticity of Supply Formula

Elasticity of Supply Greater than 1: elastic Less than 1: inelastic Exactly 1: unitary

Just like demand, supply can become more elastic over time Think about bananas Growers cannot quickly increase supply BUT- If the price increase lasted long enough, growers would be able to increase their supply

What affects supply elasticity? Production Possibilities Time Since Price Change Product Storage Elastic Easy to make more Short production time Easy & cheap to store Inelastic Difficult to make more Longer production time Limitations on storage (cost, time, difficulty)

What is the elasticity of supply of cakes if the price increases from $4 to $6?

Price of T-shirt Quantity Supplied in Fall/Winter Quantity Supplied in Spring/Summer $4 3000 5000 $5 2400 4200 $6 1600 $7 800 1800 What is the supply elasticity if the price rises from $5 to $6 for both time periods? Which time period is more elastic? Why?