Supply Chapter 4 Price Effect Market Supply Price Elasticity Change in Supply

Supply The various amounts of something a producer is willing and able to sell at different prices at a given time –General rule: Sell a lot at a high price Sell a little at low price

Price Quantity S

Price Effect As price changes, quantity supplied changes –As each new quantity supplied is added, the marginal cost of production increases –Thus, as quantity goes up, so does the price and vice versa Price Effect: price changes effect quantity changes

Price Quantity S

Market Supply The sum of all individual supplies in a given market at a particular time All suppliers of a given product included in the figures given

Price Elasticity The degree in which price changes effect quantity supplied –Small price changes that effect quantity supplied A LOT is elastic –Small price changes that have little to no effect on quantity supplied is inelastic

Two Reasons for Elasticity: 1.Availability of Inputs 2.Adjust for time Examples: –Pizza: Elastic (availability of Subs) –Flu Vaccine: Inelastic (adjust for time)

Price Quantity S P1 P2 Q1Q2 Big Change Small Change Inelastic

Price Quantity S P1 P2 Q1Q2 Similar Change Similar Change Elastic

Change in Supply Change is supply results in quantity changes at all prices (a new line is drawn on the graph)

Price Quantity S2 S1 S1 to S2 = Increase in Supply

Price Quantity S2 S1 S1 to S2 = Decrease in Supply

Change in supply occurs when: 1.Change in marginal cost of production (improving production methods, new and cheaper materials & equipment) 2.Change in number of sellers/producers (new competition) 3.Change in expectations (expecting future changes – politics, new laws and tax regulations, war, etc)

4. Substitutes: if price of a good goes up, the supply of its substitute goes down [QS of the 1 st good goes up due to the price increase – LAW OF SUPPLY – thus the 2 nd good must cut back on production so additional quantities of the 1 st good can be produced] 5. Compliments: if price of a good goes up, the supply of its compliment also goes up [QS of the 1 st good goes up due to price increase – LAW OF SUPPLY – thus when more of the 1 st good is made, more of the 2 nd good is automatically produced]