Supply Demand is usually a much easier concept for students because it deals with the consumption side of the economy—and students are familiar with being consumers. Now you have to change roles to understand supply. Think as a business owner. What would you want to do if you owned a business and you were on the production side of the economy?
Supply The Law of Supply—The quantity of a product supplied varies directly with price, ceteris paribus. --This means the producer will increase their supply as price goes up, other factors held constant.
Supply Individual Supply Schedule—A chart or table that lists the quantity that one supplier will produce at each given price Market Supply Schedule– A chart or table that lists the quantity that all producers within an industry or market will produce at each given price
Supply Supply curve—Graph that represents the different quantities that will be supplied at each given price (there are individual and market supply curves, just as there are individual or market supply schedules)
SupplySupply isUpward slopingBecause there areMore people willingTo supply asPrice goes up andBecause it requiresMore money toIncrease production.
Change in Quantity Supplied This is a movement ALONG the curve resulting from a change in price As prices change, producers will be willing to produce more or less (depending on the direction of the price change) resulting in a new point on the same graph
Change in Qs
Change in Supply Change in supply is when there is a shift in the entire supply curve resulting from some outside force that changes the amount of a product supplied at each given point
Change in Supply Cost—how much the supplier must pay to make the item Price—how much the supplier will earn when they sell the item
Change in Supply Say you are a producer. What would cause you to produce MORE or LESS of a product, even though the price (how much you will earn when you sell the product) doesn’t change at all?
Change in Supply Determinants of Supply—Forces that will cause the entire supply curve to shift either left or right (so producers will produce more or less, even though the price of the product has not changed)
Determinants of Supply Factor costs—if the cost of production increases, the selling price will have to rise to cover these costs --so anything that will affect the cost of ANY of the factors of production (land, labor, capital) will shift the curve
Determinants of Supply Technology and regulations—new production technology can lower the cost of production; regulations and requirements implemented by the government will raise the cost of production
Determinants of Supply Expectations—future expectations of the market or industry may cause a firm to adjust its quantity supplied The number of firms—when more firms enter the industry, more of the good can be offered at each price
Determinants of Supply The bottom line— ANYTHING that changes how long it takes to produce or how much it costs to produce will change supply and shift the supply curve
Movement of the Supply Curve If it costs more to make an item, will you make more or less? LESS, so the curve shifts LEFT (just like the demand curve) If is costs less to make an item, will you make more or less? MORE, so the curve shifts RIGHT (just like the demand curve)
Movements of the Supply Curve
Supply Elasticity Supply curves, like demand curves, have different slops. They can be more vertical or more horizontal, and this is due to differences in supply elasticity. However, the determinants of a product’s supply elasticity is different than the determinants for demand elasticity.
Supply Elasticity Supply elasticity is a measure of the way in which quantity supplied responds to a change in price. Elastic supply—a small change in price results in a relatively larger change in quantity supplied Inelastic supply—a small change in price results in a proportionally smaller change in quantity supplied Unit Elastic—a change in price results in a proportionally equal change in Qs
Elastic Supply Occurs when price changes are met with proportionally larger changes in Qs The price changes, and the producer responds by increasing production. The producer has the capability and capacity to increase production, there are no (or few) limits on how much they can produce.
Elastic Supply More horizontal Price changes, and Qs responds even more
Inelastic Supply Occurs when changes in price is met with a proportionally smaller change in Qs Even if the producer wanted to increase or decrease Qs, they can’t. There must be some sort of technical or natural constraint that will not allow producers increase production.
Inelastic Supply More vertical Producers do not have much control over Qs, even if prices change
Determinants of Supply Elasticity The nature of its production is the only determinant to supply elasticity. If a firm can adjust to new prices quickly, then supply is likely to be elastic. If the nature of production is such that adjustments take longer, then supply is likely to be inelastic.