1. Chapter 5 - Supply What is Supply? Law of Supply Determinants of Supply Change in Supply v. Quantity Supplied Elasticity of Supply Equilibrium: Supply = Demand

2. DEFINITION: Supply: a schedule or curve shows the relationship between price and quantity:  the quantity producers are willing to supply  at each of a series of prices

3. Law of Supply: As price increases, quantity supplied increases.  Assumption: competitive industry  Direct relationship between price & quantity  Results in an upward sloping curve

4. Supply Curve:

5. Case Study: Sport Socks

6. Case Study: Answer #1

7. Case Study: Sport Socks

9. Determinants of Supply: Supply Shifters: 1. Technology Improvements in technology = increased supply Increased efficiency = increased supply 2. Number of Sellers New firms, imports = increased supply 3. Change in Costs Change in resource prices (higher costs = decreased supply) Taxes / subsidies

10. Determinants of Supply (cont’d): Supply Shifters: 4. Weather/Environment Certain industries, eg. agriculture, tourism Natural disasters, eg. Katrina destoroying production facilities 5. Suppliers’ Expectations Expectations of future price changes affect supply If future prices expected to rise, producers may produce more

11. Change in Supply:

14. Supply v. Quantity Supplied: Change in Supply: Caused by a change in one or more determinants of supply Shifts entire supply curve Change in Quantity Supplied: Caused by change in price Movement from one point to another along an existing supply curve

15. DEFINITION: Elasticity of Supply: A measure of how much quantity supplied changes in response to a change in price.

16. Elastic Supply: If a given change in Price causes suppliers to make relatively large changes in Quantity Supplied, supply is elastic. Suppliers can easily adjust output Additional resources (labour, capital, natural resources) are available Elasticity of supply tends to increase over time

17. Inelastic Supply: If a given change in Price causes suppliers to make only small changes in Quantity Supplied, supply is inelastic. Suppliers cannot easily adjust output Additional resources (labour, capital, natural resources) are unavailable Suppliers face rising costs Supply is most inelastic in the short run

18. Price Elasticity of Supply: A measure of the responsiveness of suppliers to a change in price. If E s is greater than 1, demand is elastic If E s is less than 1, demand is inelastic If E s is = 1, demand is unitary

19. Price Elasticity of Supply: CALCULATING COEFFICIENT OF ELASTICITY: E s = % change in Q % change in P % change in Q = Q2–Q1 (Q2+Q1)/2 % change in P = P2–P1 (P2+P1)/2

20. Case Study: Sport Socks Calculate the coefficient of elasticity from: a) $6 to $7 b) $5 to $4

21. Case Study: Answer Coefficient of elasticity from: a) $6 to $7: % change in P = P2–P1 (P2+P1)/2 % change in Q = Q2–Q1 (Q2+Q1)/2 E s = % change in Q % change in P b) $5 to $4: E s =.08/.22=.36 = 7–6 = 1/6.5 =.15 (7+6)/2 = 16k-15k =1k/15.5k=.06 (16k+15k)/2 E s = Q =.06/.15=.43 P

22. Equilibrium Price: