Chapter 5.1/5.3/5.4 Supply

Intro to Supply Supply – the amount of a product offered for sale at all possible prices Law of Supply – as P goes up, Qs will go up; or that suppliers usually offer more for sale at higher prices Supply schedule – lists various Q’s of a product supplied at all possible P’s Supply Curve – graph of the same

Figure 5 Ben’s Supply Schedule and Supply Curve Price of Ice-Cream Cone Quantity of Ice-Cream Cones $ An increase in price increases quantity of cones supplied.

Individual vs. Market S curve Individual = one producer Market = Q’s offered at various prices by ALL firms offering the same product

Change in Qs Change in Qs is the change in amount offered for sale in response to a change in price Represented by movement along the S curve

1 5 Price of Ice- Cream Cone Quantity of Ice-Cream Cones 0 S 1.00 A C $3.00 A rise in the price of ice cream cones results in a movement along the supply curve. Change in Quantity Supplied

Change in Supply When suppliers offer different amounts of a products at all prices Represented by a shift in the S curve – Increase - right Decrease – left

Figure 7 Shifts in the Supply Curve Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 Increase in supply Decrease in supply Supply curve,S 3 curve, Supply S 1 curve,S 2

Reasons for Change in Supply Cost of Inputs – if P of an input goes down, S increases Productivity – if working more efficiently, S can increase Technology – new technology usually increases S Taxes/Subsidies – increase in taxes would decrease S; adding subsidies can increase S

Cont’d Expectations – If producers think the P of their product will go up in the future, they may withhold some S now Gov’t Regulations – more regulations usually mean a decrease in S # of sellers – If more producers enter market, S increases

Elasticity of Supply Measures how responsive the Qs is to a change in price based on the producers Elastic – Change in Qs is larger than change in P (in%) Inelastic – Change in Qs is smaller than change in P (in%) Unit Elastic – change in Qs and Change in P are the same proportion

Determinants of S Elasticity All depends on how quickly a firm can adjust to new prices If the production process is very complicated, then S is usually inelastic Supply tends to be more elastic in the long run because firms can adjust more over time