Supply & Elasticity of Supply AG BM 102

Introduction Supply is the counterpart of demand It also is a schedule of prices and quantities Supply is driven by different factors Together Supply & Demand determine the market prices and quantities

Supply - A schedule of the quantities of product that producers will sell at various prices

An Example – Beef Supply PriceQuantityPriceQuantity

Some Ideas Time period important Short time – little adjustment possible Long time – lots of adjustment possible Medium – moderate adjustment possible Orchard

Upward sloping Higher prices induce more production Higher prices induce entry Higher prices mean more profit

Calculate Equation

Values

Check to see if points are on line P = 4, Q = (4) = 70 P = 5, Q = (5) = 80

Elasticity of Supply- The percentage change in quantity supplied in response to a one percent change in price

Calculate Elasticity of Supply

Interpretation Inelastic supply – between zero and 1 Elastic supply – greater than 1 Unitary elasticity - equal to 1

Discussion of Supply Elasticity Short run vs. long run Plant products vs. animal products Ag vs. non- ag (e.g., clothing) Perishable vs. storable

Change in Supply or Quantity Supplied Effect on beef market if feed price rises Effect on beef market if chicken price falls Effect on beef market if consumer income rises Effect on beef market if hard winter kills a lot of cattle

Concluding Comments Understanding supply goes a long way toward understanding markets Two parts- mechanical part & intuitive part Second is more important –Think about what will suppliers do? –How fast can they adjust? –What holds them back?

Same lists for demand Intuition important Comes from thinking systematically –What will demander do? –How fast will demander change? –Is habit an issue here? Lots of variables, but most not important –Key is to know which is which