Supply

Supply Amounts of product a producer is willing and able to make Law of Supply- more at high price less at a low price Marginal cost Supply Curve

Determinants of Supply Resource Prices Technology Taxes and Subsidies Prices of other goods Substitution in production Producer Expectations Number of Sellers

Price Elasticity of Supply Measures sellers’ responsiveness to price changes Elastic supply, producers are responsive to price changes Inelastic supply, producers are not as responsive to price changes At higher prices firms are willing and able to produce more, whereas at lower prices firms are willing and able to produce less. Price elasticity of supply measures how sensitive firms are to price changes. If supply is elastic, small changes in price will result in firms greatly altering the quantity being produced. On the other hand, when supply is inelastic, the firm is unresponsive to price changes and therefore will not change the amount being produced by much, even when the change in price is large. LO4

Price Elasticity of Supply Formula for price elasticity of supply percentage change in quantity supplied of Product X Es = percentage change in price of product X Quantitative measure of elasticity, Ed = percentage change in quantity/ percentage change in price. The concept of price elasticity also applies to supply. We use percentages so it doesn’t matter which unit of measure we are using. The elasticity formula is the same as that for demand, but we substitute the word “supplied” for the word “demanded” everywhere in the formula. Just like with price elasticity of demand, we will compute the price elasticity of supply using the midpoint formula. Elasticity of supply will always be positive since price and quantity supplied move in the same direction. LO4

Price Elasticity of Supply Time is primary determinant of elasticity of supply Time periods considered Immediate market period Short run Long run The ease of shifting resources between alternative uses is very important in price elasticity of supply because it will determine how much flexibility a producer has to adjust his/her output to a change in the price. The degree of flexibility, and therefore the time period, will be different in different industries. The immediate market period means that there is no time to adjust output in response to a price change. Some industries may not have an immediate market period if they are able to store their product. The short run means that there is enough time to adjust output by increasing or decreasing the variable inputs but not the fixed inputs. The long run means that there is enough time to adjust output by increasing or decreasing all inputs. LO4

Es: The Immediate Market Period Perfectly inelastic supply P Q Sm Pm There is no time to adjust to a price change, making supply perfectly inelastic. With a perfectly inelastic supply, the increase in demand does not change the quantity at all. P0 D2 D1 Q0 LO4

The Short Run P Ss Ps P0 D2 D1 Q0 Q Qs Short run supply is more elastic than in the immediate market period P Q Ss Ps In the short run there is enough time to adjust output by increasing or decreasing the variable inputs but not the fixed inputs. Supply is therefore more elastic than in the immediate market period, thereby resulting in a somewhat greater increase in quantity. P0 D2 D1 Q0 Qs LO4

The Long Run P SL Pl P0 D2 D1 Q0 Q Ql Long run supply is even more elastic than in the short run P Q SL In the long run there is enough time to adjust output by increasing or decreasing all inputs since all inputs are variable by this time. This means that supply will be even more elastic and with the same increase in demand, there is an even greater increase in the quantity than in the short run. In the long run all inputs are variable even the size of the firm; the firm can expand (reduce) the size of the firm in regard to long run price increases (decreases). Pl P0 D2 D1 Q0 Ql LO4

Production and cost Total Product- the total output of the firm per period Marginal product- the amount total product changes with each additional worker Law of Diminishing returns- marginal product declines by adding additional worker

Costs in the short run Fixed cost Variable cost Total cost Marginal Cost= change in total cost/ change in quantity Marginal Revenue- marginal benefit that producer gets from making one more unit

Cost in the long run Economies of scale- a firms average cost declines as firm size increases